UK, Italy, Spain announce spending cuts

Britain, Italy and Spain have announced spending cuts amid mounting fears of a second global economic crisis.

In London, the new coalition government unveiled details of some 6.2 billion pounds (7.2 billion euros or 8.9 billion dollars) in cuts as it sought to begin chipping away at a record public deficit.

London's benchmark FTSE 100 index of leading shares did not seem perturbed by the announcement detailing the cuts, which had been widely leaked to the press at the weekend, and ended the day up 0.13 percent at 5,069.61 points.

Italy's government said it would review a two-year package of budget cuts and revenue-boosting measures worth 24 billion euros, or four billion more than planned just one month ago

Spain's government, which has already announced austerity measures worth 65 billion euros, moved to bar local authorities from obtaining long-term credit for investment projects to further reduce its public deficit.

The moves follow drastic austerity measures in Greece and Portugal aimed at stemming a loss of market confidence in indebted European economies whose deficits soared during the global slump.

US stocks fall

US stocks slumped overnight on new fears over Europe's debt crisis, triggered by the rescue of a Spanish savings bank.

The Dow Jones Industrial Average lost 126.82 points (1.24 percent) to end at 10,066.57, extending last week's massive losses when the blue-chip index shrank more than four percent and briefly fell below the sensitive 10,000-point level.

The US market opened on a bearish note after the Spanish central bank's weekend rescue of regional savings bank CajaSur, burdening Spain's already strained public finances.

CajaSur's rescue came as the Spanish government introduced a fresh round of austerity measures aimed at bringing the public deficit down to a eurozone limit of three percent of gross domestic product from 11.2 percent last year.

News that Greece had fiddled deficit figures did little except increase the country's cost of borrowing and raise eyebrows at the European Union's Brussels headquarters.

But as world stock markets were pummeled in recent weeks and the euro flirted with dollar parity, that concern has given way to scarcely concealed panic.

Growing fears of another recession

Respected commentators are beginning to echo the twitterverse's shrill warnings that a once obscure debt problem could prompt another Great Recession.

If a one trillion dollar EU rescue package fails to calm markets "US GDP growth could be reduced by half to one percent over the next couple of years," Deutsche Bank analysts warned clients.

"If the rescue program fails altogether, we are looking at a potentially much more negative picture, with the distinct possibility of a double-dip recession."

The shape of the looming crisis looks eerily similar to last, with fingers pointing at the financial system, and banks in particular.

Daniel Tarullo, a member of the Federal Reserve's board, recently suggested a repeat of the 2008 crisis which saw the near collapse of the US financial sector was "not out of the question."

"One avenue through which financial turmoil in Europe might affect the US economy is by weakening the asset quality and capital positions of US financial institutions," Tarullo told Congress last week.

Banks, he said, were going through spasms that "brought back memories of developments during the recent global financial crisis."

Then, faced with doubts about the health of competitors' balance sheets, banks began closing down credit lines.

The fear is that banks will again stop trusting each other, according to Uri Dadush, a former director of international trade at the World Bank who is now with the Carnegie Endowment.

"Even though US bank exposure is relatively limited... the banking systems in Europe and the United States are so interconnected, and European banks have a lot of exposure," he said.

The top ten US banks are estimated to hold around 60 billion dollars in debt from "peripheral" European nations, around a tenth of their principal capital.

Their banking counterparts across the Atlantic, particularly in France and Germany have much more significant exposure.

The gap between inter-bank borrowing costs in Europe and the United States has exploded in recent months, which analysts say is a sign of growing mistrust.

"Broader recovery concerns and potentially elevated counterparty credit risk could be the main drivers," said Geoffrey Yu of UBS.

"Either way, investor concerns have expanded from beyond the eurozone into a broader arena."

Trade may also be hit.

As the euro was pummeled by investors, US and Asian exports have become more costly for Europeans.

Around a quarter of US manufacturing exports go to Europe. The sector employs an estimated 11.6 million Americans.

Ironically, the single European currency's fall in value may make Europe more competitive, boost exports and offer the continent an exit from the crisis.

"The euro devaluation can help," said Dadush, "a 20 percent devaluation of the euro is a big deal, but everyone has to realize that the benefits of the devaluation are going to be spread quite unevenly."

Regardless, a crisis that began with dodgy accounting now looks a whole lot more serious.