Italy and Spain see debt default cover soaring

Jittery debt markets turned the screw on Italy and Spain yesterday amid fresh signs of economic gloom for the struggling eurozone duo and more warnings of recession.

The cost of insuring against defaults in both countries spiked higher after survey evidence showed Italy and Spain leading a fourth straight month of decline for the eurozone's services sector in December.

Markets were also on edge as nervy banks parked a record €453bn (£375bn) with the European Central Bank and borrowed €15bn from its overnight lending facility, while Hungary cancelled a bond auction due to spiralling borrowing costs.

Italy looks to be plunging towards an all-but-certain recession after a deepening decline in its services sector, according to the financial information group Markit. Only Germany and France registered any growth at all during the month. The results underline the two-speed Europe developing in the eurozone after the latest rise in Spanish unemployment yesterday contrasted with falling German dole queues. Germany sold €4.1bn in 10-year debt yesterday, paying 1.93 per cent for the cash in a strong recovery after a failed bond auction spooked markets in November.

Italy and Spain can expect a much tougher ride from markets next week when they attempt to raise billions. The cost of insuring against a Spain default blew out 35 points to 4.37 per cent, meaning it costs $437 a year to insure $10,000 in sovereign debt. Italian prices were up by a similar amount at 5.15 per cent.

Markit's chief economist Chris Williamson said: "Recession is already looking inevitable in Italy and is a growing possibility in Spain as well."

In Hungary the Fidesz party cancelled its fund raising.