Worries Rise Over Spain and Italy Debt

Two weeks ago, the markets seemed to be on firmer footing after the new bailout of Greece was structured to prevent contagion. But on Tuesday, traders renewed their attacks on Italy and Spain pushing their borrowing costs, at least for now, to the tipping point that led Greece, Ireland and Portugal to apply for bailouts.

Some people now fear that Italy and Spain could run out of cash to meet their debt obligations in a matter of months if, like the others, they are shut out of international markets.

JPMorgan is warning its clients that Italy and Spain have thin margins of safety. The countries “will run out of cash in September and February respectively, if they lose access to funding markets,” the investment bank said. Those fears risk leading to “a self-fulfilling negative spiral,” the bank added.

The rescue fund negotiated last month as part of the bailout of Greece was intended to increase powers to assist countries that have not been bailed out, like Spain and Italy. It was described by some as a new Marshall Plan for Europe and was supposed to keep those nations safe from the spreading fire and, by extension, cushion the many European and American banks that hold their debt.

However, some skeptics had warned that the fund would not do enough, particularly if larger economies were devoured by the debt crisis. While the economies of Greece, Ireland and Portugal are relatively small, European leaders would face challenges of a different magnitude if Italy and Spain were engulfed by the same forces. For instance, if Italy’s economy stalls, higher interest rates could make it too costly to service Italy’s heaving debt, which, at 119 percent of gross domestic product, is one of the world’s largest.

With many Europeans off for their summer holidays, thin trading conditions may be exaggerating the market’s movements this week. Still, the sense of urgency was palpable in Rome, where Giulio Tremonti, Italy’s finance minister, held an emergency meeting of the country’s financial authorities as interest rates on Italy’s benchmark 10-year bond touched a 14-year high of 6.21 percent on Tuesday.

A leadership vacuum at the highest levels of the Italian government has further unnerved investors. Prime Minister Silvio Berlusconi has been silent on the debt crisis for nearly a month as he battles a sex scandal and grapples with court cases. He was scheduled to address the matter on Wednesday in a speech on the economy before Parliament.

In Madrid, Prime Minister José Luis Rodríguez Zapatero delayed the start of his vacation Tuesday to cope with Spain’s problems even as he agreed last week to step down early to take responsibility for Spain’s economic crisis.

The yield for the Spanish 10-year bond rose to 6.45 percent, the highest level since Spain joined the euro club, before retreating a bit. The surge is ill-timed because the government needs to raise as much as 3.5 billion euros (nearly $5 billion) in a bond auction Thursday.

The governments of Germany and France, the euro zone’s largest economies, can hardly afford a bigger cleanup bill for Europe’s debt crisis. Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France hinted as much last month, telling Mr. Berlusconi in separate brief conversations that they felt sure he would do the right thing for the economy, according to a person with knowledge of the discussions.

Both Italy and Spain still need to tackle a mountain of debt and show they are making real progress toward straightening out their finances. Until that happens, investors are likely to keep driving their borrowing costs higher.

Markets are also unnerved by the prospect that creditors would share additional pain should other countries go the way of Greece. With German and French politicians pressured to show that taxpayers will not be the only ones saddled with the bailout costs, banks in those countries agreed to take some losses in the most recent bailout of Greece.

Liz Alderman reported from Paris, and Matthew Saltmarsh from London. Jack Ewing contributed reporting from Frankfurt, and Rachel Donadio from Rome.

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