Europe is on the brink again. The region's debt crisis flared on Monday as fears intensified that Spain would be next in line for a government bailout.
A recession is deepening in Spain, the fourth-largest economy that uses the euro currency, and a growing number of its regional governments are seeking financial lifelines to make ends meet. The interest rate on Spanish government bonds soared in a sign of waning market confidence in the country's ability to pay off its debts.
The prospect of bailing out Spain is worrisome for Europe because the potential cost far exceeds what's available in existing emergency funds. Financial markets are also watching Italy, another major European economy with large debts and a feeble economy.
Stocks fell sharply across Europe and around the world. Moody's Investors Service said it is considering lowering its triple-A ratings on the debt of Germany, the Netherlands and Luxembourg -- Europe's strongest economies -- due to "rising uncertainty" about Europe's debt crisis.
The interest rate on Spain's 10-year bond hit 7.56% in the morning, the highest since the country joined the euro in 1999.
Concern over Spain increased Monday after the country's central bank said the economy shrank by 0.4% during the second quarter, compared with the previous three months. The government predicts the economy won't return to growth until 2014 as new austerity measures hurt consumers and businesses.
On top of that, Spain is facing new costs as a growing number of regional governments ask federal authorities for assistance.
The eastern region of Valencia revealed Friday it would need a bailout from the central Madrid government. Over the weekend, the southern region of Murcia said it may need help.
Spain has already required an emergency loan package of up to 100 billion euros ($121 billion) to bail out its banks. But that aid hasn't quelled markets, because the government is ultimately liable to repay the money. It had been hoped that responsibility for repayments would shift from the government to the banks. But that shift is a long way off -- a pan-European banking authority would have to be created first, and that could be years away.
Yet it is far more than Spain's struggle that has unnerved markets.
Greece is still battling a mountain of debt, and international creditors will visit the country today to check on the country's attempts to reform its economy. There is concern that officials from the European Commission, European Central Bank and the International Monetary Fund will find that Greece is not living up to the terms of its bailouts and could withhold future funds.
Italy has also been caught up in fears that it may be pushed into asking for aid.
Italy's economy is stagnating, and markets are worried that it may soon not be able to maintain its debt burden of 1.9 trillion euros ($2.32 trillion) -- the biggest in the eurozone after Greece.
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