Global stocks fell steeply today as the European Commission called for a reassessment of the euro zone's bailout funds to persuade markets the euro zone can respond to the debt crisis.
This evening, the S&P 500 and Nasdaq fell more than 4 per cent on much higher-than-average volume, while the Dow added to losses today as worries about the outlook for the US economy and the debt crisis in Europe escalated.
Stocks suffered the worst sell-off today since the 2008 financial crisis. Over the past 10 days alone, the Dow, S&P 500 and Nasdaq have dropped about 8 per cent.
The EC move came as the European Central Bank opted to leave interest rates unchanged at 1.5 per cent and after Spanish and Italian bond yields this week rose closer to unsustainable levels.
"I . . . urge a rapid re-assessment of all elements related to the European Financial Stability Facility (EFSF), and concomitantly the European Stability Mechanism (ESM), in order to ensure that they are equipped with the means for dealing with contagious risk," European Commission president Jose Manuel Barroso said in a letter to EU leaders.
Ireland, Greece and Portugal already depend on emergency loans from the euro zone and the International Monetary Fund and the commission's bailout fund, the EFSF is currently too small to provide funding to Spain, the fourth biggest euro zone economy and Italy, the third biggest, if needed.
Economists have said the bailout fund, now at €440 billion, should be bigger - maybe twice its current size.
Mr Barroso did not explicitly mention in his letter an increase in the size of the EFSF, but a Commission spokeswoman clarified at a regular briefing that the call included the size of the funds - the EFSF and the European Stability Mechanism due to replace it from 2013.
Mr Barroso said a re-assessment of the bailout funds was needed, because markets were unconvinced that the euro zone could handle the crisis, which was now threatening core euro zone countries.
"Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis," Mr Barroso said. "It is clear that we are no longer managing a crisis just in the euro area periphery."
Mr Barroso also seemed to make a veiled appeal to the European Central Bank to help manage the crisis.
"Euro area financial stability must be safeguarded, with all EU institutions playing their part with the full backing of euro area Member States," he said.
Markets expect the ECB will resume its programme of buying bonds of distressed governments, at least until the EFSF can legally take over later this year, once its new powers to do that are approved by some national parliaments in autumn.
ECB president Jean-Claude Trichet said its programme of buying government bonds was ongoing.
As expected, the Bank of England also kept its key interest rate steady at 0.5 per cent today and left open the option of more quantitative easing should the economy weaken further.
Spain paid sharply higher yields to sell €3.3 billion of bonds today after a renewed market attack that has driven its costs of borrowing close to unsustainable levels.
Reuters