Spanish, Italian markets slammed

Investors battered Italian and Spanish financial markets on Tuesday, with the countries' borrowing rates hitting euro-era highs on fears that a global economic slowdown will hurt their chances of dodging Europe's debt crisis.

As stocks and bonds nose-dived in Madrid and Milan, Spanish Prime Minister Jose Luis Rodriguez Zapatero delayed his vacation by a day to monitor the increasingly bleak scenario with his finance minister, Elena Salgado.

She told Zapatero "that the experts agree that the current situation is due to the financial crisis plaguing the euro area worsened by the uncertainty of the economic situation in the United States," Zapatero's administration said in a statement issued after markets closed.

A tense situation also developed Tuesday night in downtown Madrid, with riot police preventing hundreds of anti-austerity protesters from entering the central plaza where they have held numerous demonstrations since May. The protests are directed against Spain's political status quo and a stunning 35 per cent joblessness rate for people ages 16-29.

There were no immediate reports of violent clashes, but Spanish media showed photos of officers dragging away some protesters.

Earlier Tuesday, yield for the Spanish 10-year bond rose as far as 6.45 per cent, the highest since the euro was created and near levels seen in Greece, Ireland and Portugal before they were forced to ask for rescue loans.

Italy's equivalent bond yield jumped to 6.18 per cent, above where it was before July 21, when the EU announced its latest debt crisis plan, including a second Greek bailout, to calm and contain market jitters.

U.S. debt crisis adds to worry

That plan had helped lift spirits briefly, but markets were quickly roiled again by worries that the U.S. economy may be sliding back toward recession.

Coupled with lingering suspicions that the EU debt crisis plan will not be enough to stamp out the crisis, the fears about the U.S. soured market sentiment across the globe.

In times of trouble, traders' knee-jerk reaction is to sell off what they perceive as high-risk investments — including government bonds in weak European countries — and to buy into safer ones, such as gold and German bonds.

Although Europe's renewed debt tensions are largely a symptom of a global rise in fears among investors, the impact they have on Spain and Italy, the euro zone's third- and fourth-largest economies, is potentially huge. The increased yields threaten Italy's and Spain's ability to fund government programs, and both nations are too expensive to rescue for Europe's bailout fund.

"There is increasing uncertainty in the market and all the peripheral markets, the ones which have weaker political contexts, will continue to suffer," said Luca Peviania, managing director of P&G, a Rome-based asset management company.

Spain's main stock index sank for the second day in a row, closing down 2.2 per cent after plunging 3.2 per cent a day earlier, and hitting its lowest level since July 2010. Italy's index fell another 2.5 per cent.