Spanish Debt Fears Sour Markets Across Europe

Stock markets across Europe have taken a hammering as investors sense Spain needing both a bank and government bailout.

In early Monday trading Spanish 10-year bond yields shot up to as much as 7.56%, as markets in Europe and Asia come under increasing strain amid the eurozone debt crisis.

Spain's economy minister Luis de Guindos ruled out that the country could need a full-scale bailout, as the yield rates - the government borrowing cost - reached the highest level since creation of the euro.

Asked about this possibility on the sidelines of a congress hearing about the European aid to ailing Spanish lenders, Mr De Guindos said: "Absolutely not."

However the markets were not impressed and the Spanish Ibex stock exchange at first lost 5%, the Greek market plunged by 6%, while in Italy it dropped by 3.77% as the CAC 40 in Paris lost 2%.

By late afternoon the Ibex eased to close 1.1% down and Italy's Mib off 2.76%. The CAC 40 dropped 2.89% and Germany's Dax was hit by 3.18%.

The London FTSE 100 closed at 2.09% down and there were no risers in the day.

Biggest fallers were Evraz, down 6.9%, Aviva at 6.6%, Vedanta off 5.1%, Hargreaves Lansdown losing 4.6% and Petrofac down 4.4%.

In response to the dramatic sell-off Italy's exchange regulator announced a ban on short-selling of stocks, which is expected to last until Friday, and Spain followed the Italian lead to institute a three-month ban of short selling all stocks

Although German officials tried to calm markets its finance minister Wolfgang Schaeuble then announced a decision to meet Mr de Guindos on Tuesday.

Adding to the suspicion of eurozone disunity, the European Commission announced that the next bailout tranche aid for Greece is unlikely to be paid before September.

The market strain comes as the Bank of Spain said the country's economy contracted by 0.4% on a quarterly basis in the three months from April to June, having contracted by 0.3% in the first quarter of the year.

In a monthly report the central bank also estimated the economy contracted by 1.0% on an annual basis, compared with a fall of 0.4% in the preceding quarter.

Bank of Spain deputy governor Fernando Restoy said the solution to the current debt crisis was to make more cuts, more reforms, and more mechanisms to strengthen the eurozone economy.

"Current market problems reflect problems in Spain as well as the eurozone," he said.

The Spanish market slide has occurred as the autonomous region of Valencia asked for a lifeline from central government after running out of money, and the Murcia region reportedly sought 300m euro (£233m) help.

On Friday, eurozone finance ministers held a conference call to approve an aid package for Spanish banks of up to 100bn euro (£77bn).

But by late Friday afternoon the Ibex dropped by as much as 5.8%. Italy's Mib was down by as much as 4.5%. In London, the FTSE 100 closed 1.09% down and the Dow Jones was off 0.93%.

Meanwhile, the euro reached an 12-year low against the yen as Asian investors moved out of the troubled currency, and the Nikkei closed 2.99% down and the Hang Seng ended 1.86% lower on Monday.