NEW YORK SHARES

• FTSE 100 index of leading shares down 2% as Spain bans short-selling of shares to stem stock market losses
• French and German markets down 3%
  
• Italy heads towards bail-out with nearly 1trillion public debt
  
• More Spanish regional governments expected to call on central government for help, sparking fears Spain will need full bail-out
• Spanish sovereign borrowing costs soar to crisis levels: 10-year bond yields at 7.5%, unsustainable in medium term

By James Salmon

PUBLISHED: 03:16 EST, 23 July 2012 | UPDATED: 03:23 EST, 24 July 2012

Fears that Spain will need a full blown bail-out wiped 30billion off the value of Britain’s biggest companies yesterday.

Markets are worried that the latest turmoil in Spain, the eurozone’s fourth largest economy, is pushing the euro to the brink of collapse.

Its financial problems make the Greek meltdown look like a ‘tea party’, according to one leading commentator.

World stock markets fell by about 2 per cent as the province of Murcia became Spain’s second regional government after Valencia to ask the central government for support.

The FTSE 100 index dropped 2.1 per cent yesterday, wiping 30billion off the value of UK’s biggest companies. Shares in British banks, which have billions of pounds tied up in Spanish loans, fell sharply.

The French Cac 40 was down 2.9 per cent, the German Dax fell 3.2 per cent and the Dow Jones in the US dropped 0.79 per cent.

Spain’s Ibex index fell by 4.5 per cent at one stage, although it bounced back and was down 1.1 per cent at the close of trading.

Murcia and Valencia, which both sit on Spain’s Mediterranean coast, are among the hardest hit by the collapse of the property bubble, which has built up over the last decade.

Spain’s property crash has caused misery for almost half a million Britons who have holiday homes there, with average house prices falling by a quarter since the start of the crash.

More grim figures from the Bank of Spain – the country’s central bank – yesterday showed that the country has sunk deeper into recession.

The economy contracted by 0.4 per cent in the three months from April to June, having shrunk 0.3 per cent in the first three months. Spain’s unemployment rate sits at 24 per cent.

The interest rate the Spanish government is charged to borrow – a key measure of its financial health – soared to a record high of 7.5 per cent. Anything above 7 per cent is seen as unsustainable for debt-riddled countries.

Fears are also growing that Italy, the eurozone’s third largest economy, is heading towards a bail-out. Public debt is heading towards 1trillion. Ten Italian cities, including Naples, are on the verge of bankruptcy, according to government experts quoted in an Italian newspaper.

In a stark indication of the scale of the problem, regulators in Spain and Italy stepped in to impose temporary bans on short-selling in which speculators attempt to make money by betting on share prices going down.

European leaders agreed on Friday to grant bail-out cash of up to 80billion to Spain’s banks, which are sitting on 122billion of bad loans. But the latest grim news has added to concerns that Spain will follow Greece, Ireland and Portugal in requiring a full blown bail-out to prop up its economy. A Spanish bailout could end up costing more than 250billion.

Spain’s economy minister, Luis de Guindos, insisted that the country did not need more help.

But David Buik, a veteran commentator from broker BGC Partners, said: ‘Greece’s financial problems look like a tea party in comparison to Spain’s fiscal black hole. Unless European leaders face up to reality and take decisive action we are seeing the destruction of the euro.

‘It seems almost inevitable that Spain will require an official sovereign bail-out, which may turn out to be hundreds of billions despite protestations to the contrary from its government.’

Matthew Sinclair, director of the TaxPayers’ Alliance, said: ‘This represents the sound of yet another death knell for the euro in what EU leaders are sadly ensuring is a slow, agonising death for all involved.’

BY ALEX BRUMMER

The eurozone faces a summer of unprecedented turbulence as the financial crises in Spain and Italy spread from the centres of government to the countries’ regions.

In Spain, the disruption on the financial markets has triggered a series of public protests on the streets. These threaten to pose the biggest challenge to the country’s democratic system since the death of the dictator Franco in 1975, which ushered in a period of modernisation, prosperity and free elections.

The urgency of the current situation was underlined by the decision of the country’s economy minister Luis de Guindos to fly to Germany today to request further bail-out money in addition to the injection of 78billion for the banking system that has already been agreed by European leaders.

The crisis facing Spain comes as financial leaders from Brussels, Frankfurt and the International Monetary Fund are due in Athens to try to tackle Greece’s latest debt problems.

The truth is the monumental scale of the problems facing the beleaguered nations in euroland is moving to a new, dangerous level. Instead of being merely a problem for banks and central government, the economic woes are now starting to affect the countries’ grassroots. Across the so-called ClubMed nations (the deeply indebted Greece, Spain, Portugal and Italy), regions and municipalities are fast running out of money and are seeking rescue from their central governments. In turn, political leaders in Madrid and Rome are looking to Germany yet again for salvation.

This latest stage in the two-and-half-year crisis in the euro currency area comes at a particularly awkward moment as national leaders travel to London for the Olympics and as bankers and policymakers head for their yachts and holiday hideaways.

Invariably, late July and August – when these key figures are on holiday – have proved to be some of the most dangerous times in the world’s financial markets. In the summer of 1992 the pound and lira came under enormous pressure leading to their ejection from the European Monetary System (the predecessor of the eurozone).

   
The sub-prime credit crunch happened in August 2007 and the ‘great panic’ that led to the collapse of Lehman Brothers began in August 2008. This summer, the stakes are enormously high. If Europe’s politicians and central bankers cannot find a way to win back the confidence of the financial markets, there is a huge risk of the euro area breaking up. The potential for more bank collapses would make the events of four years ago look like a minor economic squall.

Having badly mishandled the meltdown in its own country’s banking system, the conservative government in Spain is now in danger of seeing its regions implode. 

After the Valencia region disclosed last week that it was appealing to Madrid for a bail-out, the Murcia region also demanded one. Catalonia is also said to be in financial difficulty.

Italy’s regions face similar catastrophe with reports suggesting that as many as half the provinces are in serious financial difficulty. Several local authorities have warned that some schools may not be able to re-open after the summer because there might not be enough money to pay teachers as a result of austerity measures already taken.

As for the financial markets, the increasing amount of debt and the collapse in the eurozone has led to a dramatic reduction in the level of confidence in the struggling economies.

As a result, interest rates have risen sharply, making it more expensive for countries to borrow money. Spanish bonds yields have shot up to almost 7.5 per cent, a level which will be hard for the government there to deal with over a sustained period.

During recent days the euro has also tumbled in value against the pound, the dollar and the yen. Significantly, all these currencies are run by countries with governments able to take their own interest rate and budgetary decisions, unlike those in the eurozone which have to get the approval of the Commission in Brussels and the German government which has offered assistance to its ailing fellow eurozone members only if stringent austerity measures are implemented.

Experts have argued for almost a year that if the eurozone was to have any chance of weathering the storm, there would have to be a fund of at least two trillion euros to help rescue Spain and Italy and keep the single currency together. Yet such huge sums are not available. Current stability funds amount to 700billion euros.

Chancellor George Osborne is not in a position to think Britain can escape the fallout from the escalating chaos in the eurozone. Aside from the risk that European countries will be less able to afford our goods, a series of defaults by banks and euro area governments would be a huge blow to the fragile confidence in our own banks and the City.

The feelgood uplift the Coalition prayed for from the Diamond Jubilee and Olympics may be short-lived as Europe’s leaders appear paralysed by the combined ferocity of the assault from the financial markets and growing unrest in their streets.

VIDEO: Markets are taking a beating...