Global markets continue to fall amid rising concerns that the eurozone debt crisis could spread to Italy and Spain.
Japan’s Nikkei share index fell 1 per cent overnight, while Hong Kong’s Hang Seng was down 2 per cent. There were losses in Europe in early trades this morning, at 8.34am the FTSE100 was down 1.4 per cent to 5843.93. The Dax and the Cac 40 were both down by around 2 per cent.
There are worries that both Italy and Spain may seek a European Union and International Monetary Fund bail-out. Concerns from Italy come as the government continues with plans for an austerity budget to reduce its public deficit.
Italy’s finance minister Giulio Tremonti has proposed £42bn of budget cuts over three years and is aiming to cut the deficit to zero by 2014 from this year’s 3.9 per cent of GDP. Prime Minister Silvio Berlusconi indicated yesterday that the austerity package may not have full cabinet support.
Borrowing costs in both Italy and Spain have soared by record levels. Italy, which is the eurozone’s third largest economy and the largest bond market on the continent, saw the premium it pays over German debt rise by more than a quarter to 3 per cent. Spain’s benchmark borrowing costs rose above 6 per cent.
Eurozone finance ministers have indicated that they may look to increase the flexibility of the European Financial Stability Facility – the bail out fund which eurozone member states contribute to – in a bid to prevent any further risk of contagion. Greece, Portugal and the Republic of Ireland have already sought a bail-out from the IMF. Finance ministers have agreed to look at the interest rates that those three nations pay, potentially lengthening the maturity of their loans.
The news comes as European leaders acknowledged that Greece may be set to default on its debt burden. After negotiations in Brussels, reports say that the 17 governments of the eurozone refused to rule out a sovereign debt default by Greece. Last week eurozone ministers repeated the need to avoid a default in Greece.
A statement from the European Central Bank “confirmed the position that a credit event or selective defaulte should be avoided”.