Crisis deepens as markets edge toward disaster

Spain's prime minister, José Luis Rodríguez Zapatero, continued to work at La Moncloa palace on Friday after cancelling his summer vacation, as the global economic situation crept further toward all-out crisis.

After a week that saw $2.5 trillion wiped off the world's financial markets; the cost of borrowing for Spain reach record highs; and serious losses on the nation's benchmark index, the only vaguely positive news for the PM was that the country was no longer seen as the most likely to follow in the footsteps of Greece, Ireland and Portugal ? at least in investors' minds ? as Italy's borrowing costs surpassed Spain's on Friday for the first time since the start of the sovereign debt crisis.

Italian Prime Minister Silvio Berlusconi responded to the pressure on Friday night in a special press conference in Rome, saying that finance ministers from the G7 countries would be meeting within days to talk about how to combat the euro-zone debt crisis, the main cause of the growing crisis in the global markets.

He also announced that "Italy will accelerate reforms to achieve a balanced budget in 2013."

Spain's risk premium hit a new high of 417.6 basis points on Friday, finally closing at 386, 12 points below its Thursday mark.

The stock markets went on a rollercoaster ride on Friday, after having posted losses of around four percent the day before. The blue-chip Ibex 35 spent most of Friday in the black thanks to a strong showing by its listed banks, but at the end of the day it gave up 0.18 percent to close at 8,671 points.

Nuria García, an analyst at Ahorro Corporación, said that this smaller drop of the Ibex on Friday underscores that "the problem is not just in the periphery, but in all of Europe."

Olli Rehn, EU Commissioner for Economic and Financial Affairs, said on Friday that the week's turbulence was "incomprehensible," and "not justified by the economic fundamentals"

He also said that measures agreed on July 21 to improve the scope of the European Financial Stability Facility ? the 440 billion euro rescue fund ? should be in place by September. But first, he said, national parliaments must ratify them. He called on political leaders "to do what is expected of them."

With regard to Spain and Italy, Rehn said that neither country would require a bailout and that he trusted the European Central Bank (ECB) "will carry out the necessary actions," a reference to a possible purchase of sovereign bonds from troubled countries on the secondary markets.

So far, this kind of program only exists for Irish and Portuguese bonds, according to sources who spoke to Bloomberg.

"No, I don't think that Spain and Italy are going to need a special program because their economic fundamentals do not justify it," said Rehn, noting that both states are on their way to meeting their fiscal policy targets. "The markets did not react as expected to the agreements of July 21."

Regarding Spain specifically, Rehn said it has made great progress with its adjustment and reform plans, although it was essential to apply them forcefully.

Spain's Economy Minister Elena Salgado replied saying that the Spanish government is "determined to go more deeply into the reforms, to implement them and to keep up with our commitments."

She also held that the current tension in the debt markets "is temporary" and that it will end when investors see "the clear determination" by EU countries to resolve the euro-zone crisis.