Debt crisis: Stock markets tumble amid fears over Italy and Spain

4th August 2011

Fears over the health of the global economy, and predictions that America could slide back into recession, also helped to drive the latest bout of heavy selling. The FTSE 100 index fell below the 5500 mark, leaving the blue-chip index firmly on track for its lowest closing level in nearly a year.

EC president Jose Manuel Barroso calls for a "rapid re-assessment" of rescue mechanism as eurozone debt worries sent markets down again and pushed up Spanish borrowing costs, reports the Daily Telegraph.

The European Financial Stability Fund (EFSF) was the eurozone's response to the Greek crisis, agreed on 21 July.

Yet Mindful Money blogger Simon Ward, Henderson's chief economist, warned of the risk of failing to expand this last week in his blog: "The absence of any expansion of the European Financial Stability Facility (EFSF), however, should result in Spanish and Italian yields retaining a significant risk premium. The Eurozone seems to be progressing slowly and haltingly towards a full fiscal union, with periodic bouts of market turbulence forcing politicians to accept incremental reforms."

Mr Barroso has warned that the sovereign debt crisis is spreading beyond the periphery of the eurozone, says a report in the BBC.

He also described the bond markets' treatment of Italy and Spain as "a cause of deep concern".

So far, Greece, Portugal and the Irish Republic – known as the eurozone's periphery countries – have needed bailouts. The European Commission is concerned that it might not be able to afford to rescue Italy and Spain, which have the eurozone's third and fourth largest economies.

Despite the package agreed for Greece on 21 July, bond yields for Spain and Italy have been increasing hitting euro-era highs this week.

Mindful Money economist blogger Shaun Richards commented on his blog several times that Spain and Italy were set for further trouble.

He said on his blog last week: "Spanish government bond yields have been rising again over the past couple of days…In what is by now a familiar negative feedback loop this yield challenges Spain's solvency which tends to raise the yield further and so on in an example of a very unstable equilibrium."

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