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“Debt crisis in Europe: Worries grow of spread to larger economies of Italy, Spain

 

By Anthony Faiola, Published: August 3

LONDON — Fears mounted Wednesday that Europe’s debt crisis is reaching a critical tipping point, spreading from Greece, Ireland and Portugal to the larger economies of Italy and Spain.

The deepening woes raised the prospect of a crisis that would be almost as calamitous for the global economy as the one just avoided in Washington.

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Investors drove borrowing costs for Italyand Spain to 14-year highs, fueling sharp stock market drops in London, Frankfurt, Paris, Milan and Madrid. Though Italian and Spanish bonds later rebounded, borrowing rates for both nations remained dangerously high, at more than 6 percent — and closing in on the 7 percent threshold that eventually triggered bailout talks withGreece, Ireland and Portugal.

Concern on Wednesday focused on Italy, whose sheer size — it is the world’s seventh-largest economy — makes it potentially too big to bail out and would require radical new steps from already reluctant European leaders and the European Central Bank to prevent a full-blown crisis there. The day also saw volatile trading in the bonds ofBelgium and even France as fears grew that Europe may be forced into a costly rethink of how to preserve its common currency, the euro.

The trouble in Italy and Spain came amid more signs that European economies are rapidly slowing as nations across the continent tighten their fiscal belts to combat high debt loads. At the same time, economists warn, the spending cuts in the U.S. debt agreement could undercut the anemic U.S. economic recovery. Concerns about slower growth are already rattling global markets and raising the prospect that European countries will have an even harder time than anticipated restoring themselves to health.

Underscoring the urgency, Italy’s embattled prime minister, Silvio Berlusconi, delivered an emergency address to Parliament, rejecting renewed calls for his resignation while defiantly warning that speculators are wrong to bet against Italy. He also seemed to draw a line in the sand with investors demanding more cuts, revealing no new austerity plans and calling economic growth the country’s best defense.

“We have sound economic fundamentals,” he said.

The anxiety spread as a broad plan by European leaders reached last month in an attempt to finally contain the region’s nearly two-year-old debt crisis was failing to calm investors. Led by Germany and France, the 17 nations that use the euro agreed to again shore up near-bankrupt Greece while offering new pledges to aid member countries in crisis.

But they did not promise anything near the level of funds needed to cope with financial breakdowns in Rome and Madrid, and the agreement, economists warned, lacked key details. The plan also requires ratification in European capitals — something that could be held up by the same kind of political polarization that almost triggered a U.S. default.

“Markets need to be assured that policymakers are aware of the problems and are being proactive instead of reactive,” said Raj Badiani, Europe economic analyst with IHS Global Insight. “What they need is more decisive action.””