Italian and Spanish government bond yields flirted with 14-year highs yesterday, raising the spectre of more economic distress in Europe only weeks after a hastily-arranged second bailout for Greece.
Risk rises as fresh debt woes span the globe
Global economic turmoil hit new depths yesterday as sovereign debt woes gripped both sides of the Atlantic.
Italian and Spanish government bond yields climbed to near 14-year highs, reflecting a sharp drop in investor confidence in both countries' ability to withstand the spread of Europe's crippling sovereign debt crisis.
In the US, meanwhile, consumption and manufacturing data showed growth slowing more than expected, and the threat of a rating downgrade persisted as the credit rating agency Moody's Investors Service reaffirmed the country's top "Aaa" rating but changed its outlook to negative.
"Recent downward revisions of economic growth rates and the very low growth rate recorded in the first half of 2011 call into question the strength of potential growth in the coming year or two," Moody's said.
Back in Europe, Giulio Tremonti, Italy's economy minister, held emergency talks yesterday with Jean-Claude Juncker, the president of the Eurogroup meeting of finance ministers, to discuss the unfolding situation. Silvio Berlusconi, the Italian prime minister, was expected to address parliament later in the day.
"The whole of Europe is in a very dangerous situation," Jyrki Katainen, the Finnish prime minister, said in a television interview.
Ben May, a European economist at Capital Economics in London, said deep-seated problems with debt-saddled European economies had started to overshadow efforts in recent months to prevent the spread of the continent's crisis. Leaders arranged a second bailout package for Greece only two weeks ago.
"Hopes that the latest Greek rescue package would limit contagion effects on Italy and Spain have already faded," he said, adding a default was possible for "one or both" countries.
The trouble in Europe followed closely on the long-awaited raising of the US government's US$14.3 trillion (Dh52.52tn) debt ceiling.
A measure to raise the limit by at least $2.1tn passed the US Senate on Tuesday night and was signed into law by Barack Obama, the US president, just hours before a threatened debt default deadline.
As the world's focus turned back to Europe, oil prices fell and gold, a haven asset investors pile into when they sense instability, reached all-time highs. Gold was trading at $1,662 per ounce yesterday afternoon but had traded as high as $1,671, a record for the yellow metal.
"The problems we've seen in Europe and what we've seen in the US just increases the push [for investors] away from their normal investments toward gold," said Mohammed Ali Yasin, of CAPM Investments in Abu Dhabi.
With disappointing manufacturing and consumer spending numbers coming out of the US, both the Dow Jones Industrial Index and the Standard & Poor's 500 - the country's two top stock indices - fell by more than 2 per cent on Tuesday. The Dow lost another 1 per cent in early trading yesterday, extending a nine-day losing streak.
Even the resolution of the US's long-running debt-ceiling crisis may not be enough to calm the waters as credit ratings agencies warn about downgrades. After Moody's gave the US a "negative" outlook, and Fitch Ratings, another big agency, said it would complete a review of its top "AAA" rating for the US by the end of the month. Standard & Poor's, the third global ratings company, has yet to chime in, but the compromise that raised the debt limit fell short of the $4tn in spending cuts the agency said was necessary to prevent a downgrade.
Gary Dugan, the chief investment officer at Emirates NBD, said in a note a US downgrade, while negative, "does not mean problems for all". Worry that investors might sell US government debt - some of the most heavily-traded debt in the world - and raise borrowing costs for the country was unfounded, he said.
"We would not expect to see wholesale selling of US government debt by institutions.
"Most institutional investors have sufficient flexibility in their mandate to be able to continue to hold the downgraded paper in their accounts," he said.
The most unwelcome fallout of the crisis for the Gulf's oil-producing countries would be a decline in the global oil price, said John Sfakianakis, the chief economist at Banque Saudi Fransi. But Brent crude prices hovered at about $116 per barrel yesterday, just slightly lower than the level in previous days.
"I don't think we will see oil prices this year that will cause any concern for the region," Mr Sfakianakis said.
"The issue is what happens in the US economy over the long term, and that's an open question."