Doubts on debt shake Europe

And despite indications that the European Central Bank has restarted its bond buying program after a four-month hiatus in an attempt to calm markets, the financial pressures on Italy and Spain remained acute, sending stock markets across Europe plummeting.

European Commission President Jose Manuel Barroso urged eurozone leaders to make further changes to their bailout fund - including boosting its size - to ensure it can effectively stem the debt crisis that has rocked the currency union for 21 months.

Barroso’s appeal and the ECB’s apparent turnaround came just two weeks after eurozone leaders reached what they branded a “historic’’ deal on the currency union’s crisis strategy, including a second massive bailout for Greece and far-reaching new powers for their rescue fund.

However, the accord failed to stem rising panic on financial markets over the ability of the eurozone’s third- and fourth-largest economies to repay their debts.

Although the yields, or interest rates, on Italian and Spanish bonds were below records reached earlier in the week - possibly linked to purchases by the ECB - the two countries’ stock markets were, like all others in Europe and the United States, firmly in the red, while the euro slid against the dollar.

Spain’s benchmark stock market index plunged 3.9 percent yesterday, marking its biggest one-day loss this year yet, and Italy’s stock market also plummeted, with Milan’s FTSE MIB index down by 5.16 percent.

Germany’s DAX index of blue chip companies fell by 3.4 percent, and France’s CAC 40 lost 3.9 percent.

The EU’s Barroso, meanwhile, said in a letter to eurozone leaders dated Aug. 3 but made public yesterday the main reason behind Spain’s and Italy’s market woes was “the undisciplined communication and the complexity and incompleteness of the 21st July package.’’

That, he wrote, has led to “a growing skepticism among investors about the systemic capacity of the euro area to respond to the evolving crisis.’’

The commission president urged “a rapid reassessment of all elements related to’’ the eurozone’s bailout fund, known as the European Financial Stability Facility, so it can effectively use its new powers. A spokeswoman for Barroso confirmed that those elements included the fund’s size.

But getting the eurozone to agree to new measures will not be easy.

“It doesn’t seem clear how a reopening of the debate just two weeks after the summit is supposed to help calm markets,’’ said a German government official. “What is important now is to swiftly implement the summit agreements. That’s what everyone has to concentrate on and not on reopening questions that were already answered on July 21.’’

On July 21, eurozone leaders decided to equip their bailout fund with new pre-emptive powers, such as the ability to buy up distressed government bonds to support their prices or extending short-term credit lines to countries before they are in full-blown crisis mode.

That was a recognition that rescue packages like the ones given to Greece, Ireland, and Portugal, which keep those countries out of the market for several years, would be far too expensive for Italy and Spain.

Barroso also urged leaders to speed up the implementation of the previously agreed changes to the fund, which have to be ratified by national governments and in many cases parliaments, which are currently on summer breaks.

At the moment, experts from eurozone countries as well as the European Central Bank and the Commission are still poring over the decisions taken by the leaders, and Barroso’s letter indicated that some states may already be pulling back from their commitments.

The July 21 deal was vague on the conditions under which the eurozone’s bailout fund would be allowed to intervene in the bond markets, saying only it would come with European Central Bank analysis and the approval of all eurozone countries.

The delay in implementing the changes to the fund has left the eurozone without any preventive tools, just as the 21-month debt crisis has boiled up again.

The most recent anxiety over Italy and Spain comes after banks and other private investors on Greek bonds were asked to take some losses as part of the country’s second bailout - a move that the eurozone had ruled out for most of the crisis and which analysts warn may well be in the cards for other weak European states.