Italy joins the suspect list as eurozone pressure rises

Financial markets piled new pressure on Spain and Greece yesterday and added Italy to the list of suspect peripheral eurozone countries. The weekend's crushing defeats for Spain's ruling Socialists in regional and city elections sparked investor fears of clashes between central and local government over deficit reduction as the country battles to avoid a bailout of its finances.

Meanwhile Italy is planning to bring forward to next month orders to slash its budget deficit to reassure markets. With the eurozone's biggest total debt, Italy suffered a downgrade on its outlook rating to "negative" by Standard & Poor's at the weekend.

The extra interest demanded by investors to hold Italian and Spanish 10-year government debt instead of rock-solid German debt jumped to its highest since January.

Sky-high Greek debt yields rose further on the secondary market to more than 17 per cent because of uncertainty about a €12bn aid payment next month needed to avoid default.

Greece does not have to pay the 17 per cent rate because it is propped up by international loans – but the yield reflects fears about its potential to default.

Jean-Claude Juncker, the Prime Minister of Luxembourg and chairman of the Euro Group of finance ministers, has spooked markets with talk of a "soft restructuring" of Greece's debt.

Olli Rehn, the European Commissioner for economic and financial affairs, tried to calm markets yesterday. He insisted the loan maturities on Greece's debt would be lengthened only if the bondholders agreed "on the condition that it would not create a credit event".

The uncertainty surrounding Europe's stretched peripheral states sent the euro below the key $1.40 level briefly before it staged a partial recovery.

Lee McDarby, the head of dealing at Investec Corporate Treasury, said: "These are the headlines that have been lurking in the background for months but the market seems to be taking stock of these claims which means the nerves of investors are beginning to wobble."