Markets slump on euro debt fears

4 August 2011 Last updated at 12:30 ET

Weak unemployment benefit data did nothing to lighten the mood of US traders

Global shares have dropped sharply for the second day as fears about the eurozone debt crisis intensified.

New York’s Dow Jones index fell more than 3% in early trading, while Frankfurt’s Dax and London’s FTSE 100 indexes dropped almost 3.5%.

European Commission President Jose Manuel Barroso’s warning that the sovereign debt crisis is spreading spooked the markets.

Meanwhile, the price of gold hit a new record high of $1,677 an ounce.

More weak jobs data from the US also raised concerns about the strength of the economic recovery there.

Banks were hit particularly hard, with Lloyds Banking Group down 9.9% and Royal Bank of Scotland falling 7% in London, Societe Generale losing 6.9% in Paris and Commerzbank dropping 6.8% in Frankfurt.

Miners also suffered, with Vedanta Resources slumping 9.5% and Xstrata and Eurasian Natural Resources falling more than 8% in London.

‘Exceptional circumstances’

In a letter to European governments, Mr Barroso warned that the eurozone debt crisis was spreading beyond the so-called periphery nations of Greece, Portugal and the Republic of Ireland.

He said markets “remain to be convinced that we are taking appropriate steps to resolve the crisis”.

He called on them to give their “full backing” to the euro, and urged leaders to take swift action to implement the changes to the European Financial Stability Fund (EFSF) agreed at last month’s summit of eurozone leaders.

The EFSF is essentially Europe’s rescue fund, which leaders agreed should be able to buy government debt in “exceptional financial market circumstances”.

Reports suggested that the European Central Bank (ECB) had already begun buying government bonds to help support countries with high borrowing costs.

At a press conference to announce the bank was keeping eurozone rates on hold at 1.5%, ECB President Jean-Claude Trichet merely said the process of buying bonds was “ongoing” and fully transparent.

Higher rates Continue reading the main story

Mr Trichet’s and Mr Barroso’s comments came as fears grew that Spain and Italy may be dragged into the debt crisis.

On Thursday, the interest rate, or yield, that Spain had to agree to pay to raise 2.2bn euros ($3.1bn; £1.9bn) for three years rose sharply to 4.8% from 4% at a similar bond auction in early June.

This reflects heightened concerns about Spain’s ability to repay its debts.

Spain also said it had suspended a bond auction due for 18 August.

However, analysts said demand for Thursday’s bond issue was strong and despite the rise in rates, suggested 4.8% was a sustainable rate of interest for Madrid to pay.

Yields in the secondary market, on Italian government bonds as well as Spanish, did not move significantly higher despite the auction.

In Italy, Prime Minister Silvio Berlusconi continued his attempts to calm the markets, which began with a speech on the economy to parliament on Wednesday.

Mr Berlusconi met union leaders and employers’ representatives, and pledged a number of measures to try to increase confidence in the Italian economy.

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