Debt contagion feared to hit Spain and Italy

Though the dismal US jobs report for June was getting most of the attention on Wall Street yesterday, the global economy may be expected to be more severely impacted by the spreading debt crisis in Europe.

Greece, Ireland and Portugal are seeking bailouts from the rest of Europe with spreading contagion now threatening Italy, as investors demand ever-higher interest rates on Italian government bonds.

The yield on two-year Italian bonds was up to 3.51 per cent on the fifth straight increase with yield 3.32 per cent on Thursday. On Monday the yield was 3.04 per cent.

Likewise, Spanish two-year government bond yields spiked to 3.77 per cent yesterday from 3.66 per cent on Thursday, and 3.35 per cent on Monday.

Meanwhile, the assumption that Greece's private bondholders would eventually be forced to give some kind of concessions to keep Greece afloat had led to fears that owners of Portuguese and Irish bonds would already have to do the same for their countries. Tuesday saw Portugal's debt downgraded to junk status.

This week concerns about the financial health of Spain and Italy hit those countries' markets with added force that hammered the Italian stock market 3.5 per cent yesterday, bringing the decline for the full week to 7.2 per cent.