Greek default fears push up Spain's risk premium

Spain and the rest of the European stock markets on Monday extended Friday's sharp losses in the wake of weak employment data out of the United States, which renewed concerns the world's largest economy could nosedive again, bringing the rest of the globe with it.

At the same time, the risk premiums of Spain and Italy jumped again as the euro-zone peripheral sovereign debt crisis resurfaced.

The Spanish blue-chip Ibex 35 index closed down 4.69 percent at 8,066.50 points after shedding over 3 percent on Friday. The pattern was similar in the rest of Europe. The DAX in Frankfurt declined 5.28, the CAC 40 in Paris was off 4.73 percent, while the Euro Stoxx 50 dropped 5.11 percent. In Lisbon the PSI-20 declined a more modest 2.82 percent.

The world's stock markets on Monday also woke up to further alarm bells. International Monetary Fund Managing Director Christine Lagarde warned over the weekend that the risk of a global recession was imminent. But in an interview published Sunday by German weekly Der Spiegel, the former French finance minister said there was still time to avoid a renewed downturn in the world economy.

With countries including Spain immersed in draconian austerity drives to rein in public deficit, Lagrade suggested nations adapt to the new situation by pushing policies that enhance growth. Spain's Congress on Friday approved reforming the country's Constitution to include a commitment to budgetary equilibrium.

Spain's economic growth slowed in the second quarter from the first due to the impact of the government's belt-tightening measures and weak consumer confidence in a country where over a fifth of the working population is out of a job. More worryingly, the export sector, which had been offsetting the downturn in domestic demand, also took a turn for the worse.

The euro-zone economy also slowed in the second quarter, with a particularly marked slippage in the area's powerhouse, Germany. However, European Commission President José Manuel Durão Barroso said Monday he did not expect a return to recession in Europe.

Disappointing Purchasing Manager Index figures released Monday for the service sector in Europe and China also heightened fears of a global recession. The services sector in Germany in August was at its weakest for two years, while in Britain the sector felt its largest drop in 10 years. A record low was also recorded in China. In Spain, activity contracted by the most since December 2009.

"The sharp falls we are seeing have to do with the bad PMI services data, on top of concerns about the US economy and uncertainty over Greece," Reuters quoted IG Markets analysts Daniel Pingarrón as saying.

Greece's ability to meet the commitments it took on for its extended bailout is under question again.

Concerns about the global situation were also expressed earlier in the weekend by World Bank President Robert Zoellick. "The world economy is entering a new danger zone this autumn," Zoellick said.

"The financial crisis in Europe has become a sovereign debt crisis, with serious implications for the Monetary Union, banks, and the competitiveness of some countries," he added.

The euro also weakened against the dollar, while Spain's risk premium widened further on Monday to its highest levels since the European Central Bank started buying Spanish government bonds in the market after it had hit a record euro-era level of 418 basis points at the start of August. The spread between the yield on the benchmark 10-year government bond and the German equivalent rose almost 30 basis points on Monday to 342 basis points.

Also of concern was the defeat of German Chancellor Angela Merkel's Christian Democratic Union party in the state of Mecklenburg-Western Pomerania over the weekend, which could lessen Germany's appetite for helping to resolve the euro-zone crisis.

The German Constitutional Court is due to rule later this week whether the government is in breach of German law in helping to bail out Greece, Ireland and Portugal.

There also appear to be some signs of difference within the ECB on whether to continue with the repurchase of Italian bonds in the market. The bank has urged the government of Prime Minister Silvio Berlusconi to introduce reforms to get its finances bank in shape.

The ECB said Monday it bought 13.305 billion euros in euro-zone sovereign debt in the secondary market last week, double the amount of the previous week. Since the Greek crisis of May of last year, the ECB has bought euro-zone government bonds worth 129 billion euros.

Among the big Spanish banks, Santander shed 5.94 percent, while BBVA was off 5.79 percent. The biggest blue-chip loser on the day was Sacyr Vallehermoso, which lost 7.62 percent. Sacyr needs in December to refinance some 5 billion euros in debt it took on to fund its purchase of a 20-percent stake in Repsol YPF, the country's largest oil company.