Global stock markets fall as Spain default fears grow

Sharp falls on Wall Street continued recent stock market woe, amid fears that Europe's debt crisis might be spreading to larger economies.

\r\n

\r\n

Escalating fears about Europe’s debt crisis led to rocky trading around the world, as the Spanish government’s battering at the hands of its voters stoked investors’ doubts as to whether Madrid will be able to carry out their painful spending cuts as planned.

\r\n

\r\n

\r\n

On Monday, the FTSE 100 closed down almost 2pc at 5,835.89 points, while the CAC 40 in Paris fell 2.1pc to 3,906.98 after the defeat of Spain’s ruling Socialist party in local elections raised questions as to whether the economy deemed “too big to bail” can implement the necessary austerity measures.

\r\n

\r\n

\r\n

In the US, the Dow Jones Industrial Average closed down 1.05pc at 12381.26. “What is clearly unnerving markets at the moment is just how unquantifiable the eurozone crisis still is,” said David Jones, chief market strategist at IG Index.

\r\n

\r\n

\r\n

The euro touched a record low against the Swiss franc and a two-month low against the dollar. Against the pound, the euro 0.4p to 86.99p. In contrast, the price of gold rallied to its highest in almost a fortnight, as investors took flight and looked to hedge their exposure to the risk that one of the eurozone’s stragglers will default on its debt.

\r\n

\r\n

\r\n

Spain’s voter protest spooked investors already nervous about the prospect of electorates derailing bail-out plans and austerity packages for stricken European nations, as voters in the eurozone’s successful economies resent what they view as hand-outs and those in struggling economies protest harsh fiscal reforms.

\r\n

\r\n

Concerns had also been rising after Standard & Poor’s, one of the world’s three biggest credit rating agencies, this weekend revised its outlook on Italian sovereign debt to “negative” from “stable”.

\r\n

The cut by S&P came after rival agency Fitch on Friday downgraded its view of Greece’s debt by three notches, taking its view of the bailed-out nation’s government debt further into “junk” territory.

\r\n

S&P said it had altered its stance on concerns that Italy’s tense centre-right coalition government could struggle to reduce the nation’s public deficit. Italy has seen the slowest rate of growth in the European Union in the past decade at an average yearly expansion of just 0.2pc, official data showed on Monday.

\r\n

Poor growth makes it harder for an economy to shrink its debt burden as tax receipts will disappoint.

\r\n

There were also gloomy figures for the wider region as the index tracking the output of manufacturing and services in the eurozone, compiled by researcher Markit, indicated that May saw the slowest rate of growth in seven months.

\r\n

Greek politicians on Monday announced an extra €1.6bn in savings this year and an “immediate” sale of state assets including the Piraeus and Thessaloniki ports, as the country’s international lenders kept up pressure to speed up its reforms – with the next instalment of its €110bn rescue at stake. “The battle goes on,” said Greek prime minister George Papandreou.

\r\n

Credit default swaps protecting Greek bonds hit record highs, signalling it now costs more than £1.4m to insure £10m of the debt.

\r\n

Fernando Teixeira dos Santos, Portugal’s finance minister, insisted his country’s debt was “sustainable” after its €78bn rescue. Nonetheless the cost of insuring the debt of Portuguese and other weaker eurozone members climbed.

\r\n