Markets in freefall as Italy and Spain face debt crisis

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by G.A.Ponsonby

The FTSE fell to its lowest level in almost a year and Wall Street its worst in almost three as fears rose that the European debt crisis was about to engulf Spain and Italy.

Escalating borrowing costs faced by both nations are leading to fears that the European contagion is starting to spread to bigger countries and world markets are now in freefall.

The FTSE ended the day down 191 points to levels last seen almost one year ago whilst Wall Street ended down almost 500 points at levels not seen for three years.

There are also fears that previous Eurozone bail outs has left both the European Financial Stability Fund (EFSF) and the European Stability Mechanism (ESM) with insufficient funds to bail out either Italy or Spain.  Commission president José Manuel Barroso has now called for the eurozone rescue fund to be significantly enlarged.

There are now claims that it isn’t just the euro-zone that is under threat, some analysts believe that the whole European financial system is vulnerable and there are fears that the crisis could start to spread to the big banks especially in Italy and Spain.

The cost of borrowing to both Italy and Spain is now sitting at around 6 per cent, the level at which analysts claim that debts are unmanageable.  So bad was the lack of confidence in both nations that the ECB let it be known that it was not buying the crucial Spanish and Italian bonds.

The indicators suggest that we may be seeing the beginnings of a second global slump.  With the UK economy all but stagnant the situation could see Chancellor George Osborne having to deal with a double-dip recession.

If markets are to be stabilised countries must convince investors that their debt reduction plans are credible, but the market slump is demonstrating just how little confidence they have in that.

There are also claims that the US is heading for a more severe recession than the one they have just witnessed.  One bank in the US is now paying negative interest rates.

Investors have now woken up to the fact that larger countries are not guaranteed to be in good shape nor to be bailed out should they experience debt problems, and there are fears that some countries are not in the robust good health that their governments are suggesting.

In Italy, Prime Minister Silvio Berlusconi has pledged a serious of measures aimed at rebuilding confidence.

Italy is the world’s seventh largest economy and Spain the twelfth, this fact is not lost on investors who are now rushing to safe havens, the price of the Swiss Franc, the Yen and gold are steadily increasing – gold is at an all time high.