Developing

Debt Disease Spreading Through Europe

Little over a fortnight ago, leaders claimed they had found the recipe to cure Europe (Chicago Options: ^REURTRUSD - news) 's ills.

Serving up a second bailout for Greece worth £96bn was supposed to calm the turmoil afflicting the eurozone.

But it failed to satisfy markets hungry for real evidence that the politicians have what it takes to prop up the continent's ailing economies.

Far from being contained in the comparatively small economies of Greece, Ireland (Berlin: IIK.BE - news) and Portugal, the debt disease is now infecting Italy and Spain.

Fears they will not be able to meet their obligations have spooked investors and sent borrowing costs up.

This is the scenario earlier bailouts were designed to avoid.

Italian prime minister Silvio Berlusconi is publicly bullish about his country's prospects.

But his confident claims that things are not as bad as they seem are not echoed by Europe's top politician.

European Commission president Jose Manuel Barroso admits the problems are striking at the heart of the eurozone - and markets are yet to be convinced the crisis can be averted.

It is not only European countries that are suffering.

The US looked as though it could default on loan repayments until it pulled off a last-gasp agreement to raise its debt ceiling by $2.4trn (£1.4trn).

The world's biggest economy has entered the danger zone and efforts to restrain government spending threaten to choke off its recovery.

Investors fear it could all amount to another recession for the world economy.

It could also threaten the break-up of the eurozone if a large country such as Italy is unable to pay its debts.

Britain's main trading partners are on the continent and a slowdown could damage exports at a time when domestic demand is weak.

Sliding stock market values are also bad news for pensions.

And a default in Spain or Italy could have dire consequences for any British bank with large amounts of cash tied up there.