JITTERY investors caused shares in British banks to drop by five per cent this week, as speculation grew that Spain or Italy may default on debt payments.

The two countries – the third and fourth largest economies in the eurozone – are widely seen as being too big to bail out if debt repayments are not met.

Britain could face a loss of nearly 50 billion euros if the Spanish economy were to collapse, with a similar scenario possible if Italy was to follow suit.

Barclays was the worst affected of the banks, seeing shares fall by five per cent, largely due to its exposure to both economies.

Lloyds Bank meanwhile saw shares drop by three per cent while Royal Bank of Scotland fell by one per cent.

The development follows the news that Spain’s borrowing costs have soared to alarming new levels after interest rates went up again.

The country was forced to pay higher returns – up from 4 to 4.3 per cent – to sell nearly three billion euros in bonds at a debt auction reflecting renewed market tension over the country’s ability to handle its debt.

It came after Moody’s, the US credit rating agency, downgraded Portugal’s debt by four notches to ‘junk’ status, amid continuing fears over a further Greek default.

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