Daniel Ochoa de Olza, File, Associated Press
MADRID — Investors dealt Italy and Spain a battering Tuesday as the yields on their bonds struck euro-era highs amid mounting fears that an economic slowdown will hurt their chances of dodging Europe's spreading debt crisis.
The yield for the Spanish 10-year bond rose to 6.45 percent, the highest since the euro was created, before easing back slightly to 6.39 percent by midday. The rate is near the levels seen in Greece, Ireland and Portugal before those countries were forced to ask for rescue loans.
Italy's equivalent yield jumped to 6.18 percent, above where it was before July 21, when the EU announced its latest debt crisis plan, including and a second Greek bailout, to calm and contain market jitters.
The increased market pressure bodes ill for Italy and Spain, the eurozone's third- and fourth-largest economies, who are both too expensive to rescue for Europe's bailout fund.
The turmoil is due to a toxic mix of market concerns about growth, not only in Europe but also the U.S., and the possibility that the debt crisis will continue spreading.
Over the past two weeks, markets have been roiled by worries that the U.S. economy may be sliding back towards recession and have its credit rating cut. In times of trouble, investors' knee-jerk reaction is to sell what they perceive as high-risk assets and buy into safer ones.
That was evident by the fall in the yield for German bonds, which investors bought up. The yield falls as the price of a bond price increases.
The rising borrowing rates sent shockwaves rippling through the two nations' political leadership, with Italian Finance Minister Giulio Tremonti calling an emergency meeting to analyze the situation.
And Spanish Prime Minister Jose Luis Rodriguez Zapatero postponed Tuesday the start of his near three-week summer vacation to keep abreast of economic developments.
European officials sought to downplay the danger of Spain and Italy edging closer toward needing a bailout, but the European Commission was monitoring the situation closely.
"We are very confident in both the Spanish and Italian authorities' determination to get their economies back on track," said Chantal Hughes, a spokeswoman for the EU's executive.
She said the Commission was closely monitoring developments on the markets and that, in its view, "there is no factual evidence (about the two countries' economies) that has changed in the last few days."
"The question of a rescue plan (for Spain) is not on the table, it hasn't been discussed," Hughes said.
Eurozone leaders agreed July 21 on a second, €109 billion ($157 billion) bailout for Greece and overhauled their rescue fund in hopes of keeping market turmoil from spreading to Spain and Italy, which are regarded as too big to bail out.
But the Greek deal gave only a temporary lift to Spanish and Italian bonds.
Just days after the deal, global markets were rocked by the possibility that the U.S. may default on its debt by not raising its borrowing ceiling. It managed to clinch a deal just in time, but investor sentiment was shaken. At the same time, U.S. indicators showed its economy was slowing sharply. The combination caused traders to move their cash into the safest investments — such as German bonds, Swiss accounts, gold.
In that context, confidence in the EU crisis plan's ability to protect Spain and Italy from the market turmoil dropped rapidly.
That is partly because the deal included asking bondholders to take losses on the value of their holdings by swapping them for longer-dated bonds with lower interest.
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