Fears over debt plague markets

MARKETS continued to spiral downwards even as the US’s debt deal was signed into law yesterday, with President Barack Obama warning that the economy was suffering “a Washington-inflicted wound on America”.

Even after it was passed comfortably by the Senate, investors took little solace from the deal, which will cut $2.4 trillion (£1.48 trillion) from US spending plans over the next decade. Obama called it “an important first step to ensuring as a nation that we live within our means”.

But shortly after his address, the Dow closed down 2.19 per cent, the Nasdaq down 2.75 per cent and the S&P 500 down 2.56 per cent.

And fears remain over the US losing its triple-A credit rating as negotiations over further spending cuts progress. Ratings agencies Fitch and Moody’s affirmed the USA’s triple-A status yesterday, though the latter cut its outlook to “negative”, warning that a small risk of default lies within the new “untested” fiscal plan.

And investors are awaiting S&P’s verdict: the agency had previously said that $4 trillion in cuts would be needed to avoid a downgrade.

New US consumer spending data, which showed the first drop since 2009, compounded market unease.

In the Eurozone, markets showed a similar disregard for political reassurances. Despite a new agreement on a second Greek bailout signed less than a fortnight ago, Italian ten-year bond yields peaked at 6.25 per cent and Spanish debt rates hit 6.5 per cent yesterday. That is perilously close to the seven per cent level at which other nations have asked for rescues.

The spread between 10-year Italian yields and those of German bunds reached a new high of 385 basis points. And the Dax lost another 2.3 per cent after Monday’s sell-off, while the FTSE 100 fell one per cent.

Spanish leader Jose Luis Zapatero cancelled his holiday to deal with the crisis and Italian officials held an emergency meeting, after which they said their banking system was “solid”.

Even so, the country’s two biggest lenders, Intesa Sanpaolo and Unicredit, saw their stock drop 5.2 per cent and 5.8 per cent respectively.

And as the euro plummeted to another new low against the Swiss franc, Credit Suisse and UBS felt the pain, both falling over four per cent.

The OECD warned yesterday that Greece’s latest bailout “would decrease the debt burden only slightly”.

By evening, there was growing talk that Europe might be moved to raise the size of its bailout fund to shore up market confidence.