By Michael Birnbaum,
Washington Post
November 17, 2011

MADRID — As Europe’s debt crisis escalates, investor fears are also rising, making it increasingly difficult for some countries to raise money to pay their bills. That dying demand, despite the record-high interest rates they are being forced to pay, is raising concern that those nations could face a credit freeze similar to the one that brought the world’s economy to its knees in 2008.

Spain is the latest country to try to borrow, only to find few takers. In an auction of its bonds on Thursday, Spain fell $600 million short of its goal. Demand was the lowest since the depths of the 2008 recession — even though the nation’s bonds are paying the highest interest rates since it joined the euro more than a decade ago. An earlier auction this week also raised less money than the nation had hoped.

The situation in Spain raised new alarms about the European debt crisis and helped drive U.S. stocks lower Thursday. By mid-afternoon, the Dow Jones industrial average and the Standard & Poor’s 500-stock index were down nearly 2 percent, and the tech-heavy Nasdaq was off more than 2.2 percent.

The lack of willing lenders could send countries into bankruptcy faster than the high interest rates alone, analysts say, because countries can typically withstand a temporary spike in borrowing costs. But if they can’t find anyone to lend to them at any price, that’s a sign of more dire straits, because unlike most countries that can print money in an emergency, they have no lender of last resort. Read the rest of this entry »