European debt worries re-emerge as Ireland extends guarantees

Shares have been on the back foot again this week as fears that the high levels of debt in peripheral European countries could cause yet another shock in the markets have re-emerged.

A downbeat article in the Wall Street Journal sparked losses on the FTSE after it questioned whether the European bank stress test back in July was rigorous enough and really measured how exposed Europe's banks are to government debt problems in southern and eastern Europe and Ireland.

Ian Williams, strategist at Altium Securities, said: ‘After some weeks of respite through the summer, those Eurozone tensions have begun to re-emerge and yesterday featured a selection.’

Williams said it is unlikely that any of these worries will be dispelled swiftly and therefore the issue could continue to weigh on shares.

The cost of insuring government bonds for a number of countries including Greece, Spain and Portugal rose again and the cost of insuring Irish government debt rose to a new high for the year after news last night that Ireland has decided to extend its guarantee scheme on bank deposits - which was due to expire at the end of this month - until the end of December, sparking concern about the strength of the country's banks.

News that Portuguese banks have increased the amount they have borrowed from the European Central Bank to a record level of €49.1 billion in August also spooked markets.

News later in the day that the Bank for International Settlements has decided new rules on how much banks should keep aside for a rainy day but will not announce what they are until Sunday has also unsettled investors as the market weighs which banks may need to raise more money and which ones will find they have more than enough cash already.

Most agree that the UK banks have put aside enough capital, but concerns about the position in other European countries is dragging on sentiment here and dragged US banking stocks lower overnight too.