Fears Over Spain's Economy Sparks Global Markets Sell-off

Spanish Debt Turns Global Markets Jittery

Rising fears about Spain's economy combined with worries that growth is slowing in the US triggered a sell-off on world markets on Tuesday.

Spain's borrowing costs pushed closer to unsustainable levels as markets fretted that it will fail to keep up with repayments on its debt mountain as its economy struggles.

In European markets, traders returning from Easter breaks reacted to disappointing job figures in the US which suggested the recovery in the world's biggest economy may be starting to lose momentum.

The FTSE 100 Index in the UK fell more than 2%, or 128.1 points, to 5595.6, wiping some £33 billion from its value. There were even bigger retreats for markets in France, Germany and Italy.

Banking stocks were among the biggest losers in London, with Barclays down nearly 6%, Lloyds 5% lower and Royal Bank of Scotland off 4%.

Spain's borrowing costs on bond markets rose to nearly 6%, with 7% widely seen as being unsustainable.

The fears about the strength of Spain's economy came despite it recently announcing tough austerity measures to hammer its finances back into shape.

But with the country in recession and battling unemployment close to 23%, there are fears the country may be forced to ask for a bailout, which would put the eurozone under immense pressure.

Italy's borrowing costs also rose today, reflecting similar fears about its economic strength.

Kathleen Brooks, a research director at Forex.com, said: "The fundamental backdrop is still fairly weak for European equities as austerity bites in the periphery and growth contracts.

"While growth continues to disappoint and concerns about the banks increase, the odds are increasing that Spain may require a bailout at some stage this year."

The US economy also weighed on world markets, after figures released last Friday showed that the non-farm payrolls figure was up by 120,000 in March, well below expectations and down on recent growth of more than 200,000.

Markets have also been hit in recent weeks by fears that China's growth is slowing as its exports are impacted by the weakness of some of its markets.

And tensions between the West and Iran have helped drive Brent crude oil prices above 120 US dollars a barrel, adding to fears that high oil prices will further dampen the world economy.

However, markets made strong gains in the first quarter of 2012, mainly driven by hopes surrounding the US economy.

Simon Furlong, a trader at Spreadex, said: "Spanish debt reached 6% today as fears over the weaker eurozone members intensified.

"Previous good sentiment towards the US economy provided a good distraction from the troubles facing Europe, however now the curtain has been lifted, Spain is really starting to feel the heat."