Funding dries up for Italy and Spain

SPANISH and Italian banks may have to curtail lending, threatening the European economy, as funding markets freeze amid the region’s sovereign debt crisis.

Yields on the two countries’ government bonds have climbed to records this week amid speculation that EU leaders will struggle to avert the eurozone’s first default. That’s pushed up the cost of borrowing for banks including UniCredit, Italy’s biggest, and Banco Santander, Spain’s largest.

The five biggest banks in each of the two countries have about €240 billion of debt maturing by 2013, according to data compiled by Bloomberg. They haven’t sold bonds since June, and money market rates show the interbank lending market is freezing. That may force banks to curtail lending, which could tip the region’s economy into recession just as governments are struggling with record deficits.