Market slide continues as euro debt fears resurface
Last Updated at 04:56 GMT
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Stock markets have continued the slide they began late last week as fears over Italian and Spanish debts have reasserted themselves.
European markets dropped 5% in Monday trading, led by more big falls in bank shares.
Market borrowing costs for Italy and Spain have begun to creep up again, despite the European Central Bank's decision to buy up their debts.
It also emerged that European banks may have been shifting cash to the US.
Frankfurt's Dax index ended the day 5.3% lower, while the Paris Cac 40 fell 4.7% and the FTSE 100 a comparatively modest 3.6% - its second-biggest fall this year.
The German market dropped below the low point that it reached during the sharp sell-off in early August.
Asian markets also fell earlier in the day, with the Nikkei in Tokyo ending 1.9% down, and Hong Kong's Hang Seng 3% lower. US markets remained closed on Monday for Labor Day.
The current slide in markets, which began in late Thursday trading in New York, was triggered by mounting evidence of a slowdown in the global economy and fears over the impact of US and European government austerity.
In the latest such indication, August service sector survey data released by the research group Markit on Monday showed that activity in the UK almost stagnated and business confidence in the eurozone fell at its fastest rate in August since the 2008 collapse of Lehman Brothers.
The surveys confirmed a particularly sharp slowdown in activity at German service sector firms, while France seemingly bucked the trend.
Slowdown fears have also begun to hit the oil market, with Brent crude dropping 1.4% in volatile trading on Monday.
Bank shares have taken the brunt of the latest stock market sell-off.
Royal Bank of Scotland fell 12.3%, Deutsche Bank 8.9% and Societe Generale 8.6%.
Most major banks in the US and Europe have lost about half of their value over the last six months.
Fears began to mount again that the eurozone may not be able to contain its debt crisis, and a government default could in turn lead to a European banking crisis.
Deutsche Bank's outgoing chief executive, Josef Ackermann, said on Monday that some European banks would go bust if they were forced to recognise in their accounts the existing losses on government debts they own, based on current market prices for government bonds.
Banks also face the prospect of being sued by US government mortgage agencies for mis-selling home loans during the housing boom, while the Financial Times reported on Monday that Deutsche Bank headed a list of banks being investigated in the Serious Fraud Office for similar mis-selling in the UK.
Meanwhile, some analysts suggest that there is evidence that European banks have been transferring large amounts of cash across the Atlantic in a bid to escape an emerging European banking crisis.
Data released by the US Federal Reserve on Friday indicated that unnamed foreign banks transferred cash into the country's banking system over the summer, while separate data from the ECB that shows that European banks have been withdrawing their cash from the European banking system.
Italy v Germany
Talks between Greece and its rescue creditors - the European Union and International Monetary Fund - had to be suspended on Friday because of Athens' failure to keep to its previously-agreed deficit cutting schedule.
That triggered a further rise in borrowing costs for Spain and Italy - seen by markets as the next dominoes to fall.
On Monday, a spokesman insisted the Greek government would still implement its programme and expected the latest September tranche of rescue loans to be disbursed, but markets were unmoved by the statement.
Italy's 10-year borrowing cost reached 5.56%, up from 5.25% on Friday and 4.9% in mid-August.
The level is still well below the high of 6.2%, seen at the beginning of August, that prompted the ECB to start buying up Italian and Spanish debts.
But despite the central bank's efforts, investors have begun to desert Spanish and Italian debts once more, in favour of German government bonds.
With German debt continuing to rally, Berlin's 10-year cost of borrowing tumbled to just 1.85% on Monday.
The rally in German debt reflects not only the country's role as a haven in the eurozone, but also expectations that the ECB will have to cut rates and keep them low for much longer in response to the apparent economic slowdown.
Borrowing costs for the US and UK governments - which similarly face prolonged low interest rates amid the slowdown - have also fallen sharply back towards the post-war lows they set last month.
The euro fell a further 0.8% against the dollar to $1.4095 - bringing its cumulative fall over the past week to 3.2% - and also fell 1.2% against the Swiss franc, a popular haven for investors.
Meanwhile, gold - the most popular safe investment - also rallied, to $1,900 per troy ounce. It hit a record high of $1,913.50 last month.