Europe shaken as Italian, Spanish borrowing rates rise

Europe's debt crisis intensified today as concerns deepened about rising borrowing rates for Italy and Spain, and a possible exit from the eurozone by Greece.

Stocks slid worldwide, with the TSX down 134 in Toronto early in the afternoon. On Wall Street, the Dow fell 132 points.

Italian securities regulators slapped a week-long ban on the short-selling of bank and insurance shares after the country’s benchmark share index closed down 2.8 per cent, after a five-per cent fall earlier in the session.

Short-selling involves borrowing shares and selling them in the expectation of being able to repay the loan after the share value has dropped and profiting from the difference.

Both Italian and Spanish borrowing rates rose, prompting worries both could need bailouts by the European Union and the International Monetary Fund.

A bailout for either country would stretch Europe's financial resources.

The Italian government's 10-year bond yield rose 0.25 percentage points to 6.32 per cent. Spain’s 10-year bond yield spiked 0.22 percentage points to 7.45 per cent, its highest level since the euro began in 1999.

That rate is considered unsustainable for more than a few months.

The main Spanish stock index tanked as much as five per cent before recovering to close with a 1.1 per cent loss.

Premier Mario Monti said the situation for the eurozone was "difficult."

"It is a motive for us to search for solid relations in the real industrial and commercial economy," Monti said during a visit to Russia that included the signing of business deals. He emphasized the strategic importance of Russia for Italy, highlighting €46 billion ($56.7 billion Cdn) in annual trade.

New numbers from Eurostat, the European statistics agency, showed that Italy's debt-to-GDP ratio has reached 123 per cent, the second highest in Europe after Greece.

Concern over Spain increased after the central bank said Monday that the economy contracted by 0.4 per cent during the second quarter. The government predicts the economy will keep contracting into 2013 as new austerity measures — such as tax hikes and benefit cuts — hurt consumers and businesses.

The gloomy outlook has increased worries about public finances because shrinking economic output deprives the government of revenue it needs to lower the deficit.

"The higher the yield goes, the more untenable the situation becomes," said Rebecca O'Keeffe, head of investment at Interactive Investment.

Greek shares also plunged Monday on the eve of a new inspection of Greece's troubled austerity program as investors feared the barely solvent country could be forced to leave Europe's single currency.

Roughly more than €1.5 billion ($1.8 billion) was wiped off the value of listed companies.

The main exchange in Athens closed down 7.1 per cent. Greece is being kept afloat by €240 billion ($296 billion) emergency loans which come with conditions, including a big cut in government spending.

The country also has to sell off large chunks of the state, including property, reform the civil service and inefficient tax collection system, and open protected professions to competition.

Finance Minister Yannis Stournaras will meet inspectors from the EU, the IMF and the European Central Bank on Thursday, and the so-called troika is expected to issue its report on the course of reforms in several weeks' time.

On Sunday, German Vice Chancellor Philipp Roesler questioned whether Greece can fulfil the conditions for receiving further international aid and said the idea of the country leaving the euro had "lost its horror."

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