LONDON — Fears of a U.S. default may have abated in the wake of a compromise agreement, but the debt crisis in Europe only deepened Wednesday as two giant economies — Italy and Spain – struggled to contain escalating investor panic over their ability to pay bills.
Along with signs that fiscal austerity is already slowing growth in Europe and worries that budget cuts could put the breaks on the already slowing U.S. economy, rising concern over highly indebted Italy and Spain drove stock markets sharply lower across the region early Wednesday.
Following the sharp drop in the Dow Jones industrial average on Tuesday, London’s key FTSE 100 index was down nearly 1 percent in early trading. Frankfurt’s DAX was off by more than 0.60 percent.
Asian stocks also slid on Wednesday, with major indices in Japan, Hong Kong, South Korea and Australia all losing nearly 2 percent. Tokyo’s Nikkei 225 hit its lowest closing mark since June, finishing at 9637.14 — a drop of 2.11 percent. Since Japan’s March 11 earthquake and tsunami, the Nikkei has fallen 7.6 percent, adding to the difficulties as the country tries to rebuild its northeastern coastline.
With a slew of recent, promising earnings reports, Japan’s economy has recovered faster than many expected from the disaster. Its infrastructure and supply lines are back to normal. But the strong yen poses a long-term problem for the world’s third-largest economy, raising the price of Japanese products overseas.
Japan’s central bank will hold a two-day meeting starting Thursday to consider possible quantitative easing measures.
In Europe, there were also troubling signs that a second bailout of Greece, and an agreement to more rapidly lend money to countries in crisis, has done little to boost investor confidence in Italy and Spain.
Investors on Wednesday continued dumping bonds of both countries, driving their borrowing costs further above the dangerously high level of 6 percent and toward 7 percent — the level that eventually triggered bailout requests by Greece, Ireland and Portugal.
Italy, the world’s seventh largest economy, was of particular concern. As growth slows across Europe, investors fret that it may be even harder for Rome to manage its massive debt load despite the recent passage of an austerity bill.
Prime Minister Silvio Berlusconi was scheduled to address parliament on Wednesday about Italy’s worsening economic plight, which has been compounded by political uncertainty. Berlusconi is wracked by both sex and financial scandals, and he has publicly warred with his own finance minister, Giulio Tremonti, a man seen as Italy’s economic compass, but who himself is battling a fresh scandal over his financial links to a top aide mired in a corruption probe.
The latest sign that growth is slowing across Europe emerged Wednesday, with data showing the service sector weakening as economies from Spain to Ireland, Portugal to Italy tighten spending. That followed earlier signs of a slowdown in regional manufacturing.
The latest data “raises concern that euro zone growth is rapidly ebbing and in real danger of grinding to a halt,” said Howard Archer, an economist with IHS Global Insight.
“The euro zone is clearly struggling in the face of tighter fiscal policy increasingly kicking in across the region, the European Central Bank raising interest rates twice and heightened sovereign debt tensions,” Archer said.
Correspondent Chico Harlan contributed to this report from Tokyo.