The Euro, Pound and higher-yielding commodity currencies suffered overnight as fear of sovereign debt contagion in the Euro-zone following Spain's takeover of a regional bank and tensions between North and South Korea caused a wave of selling in equities and flight to safe haven.

The main indexes in Italy (FTSE MIB: -4.4%), Portugal (OSE-20 Index: -3.1%), and Ireland (ISEQ: -4.2%) were off sharply, while shares in the main indexes in Franfurt (-2.9%), Paris (-3.6%), and London (-2.7%) were also heavy in the red. The Dow Jones Index in the US opened with triple digit losses as well.

Markets were already nervous following the weekend rescue of Spanish regional savings bank CajaSur. That was followed up by four other Spanish savings banks offering a plan to consolidate into one institution, which would become Spain's fifth-largest financial institution (with assets of €135 billion). The moves underline the weakness in the Spanish banking system, especially within Spain's savings banks.

Spain has been slow to strengthen its banking system, the IMF said, and that caused concern about further losses in Europe's financial institutions increasing the concern about contagion in the region.

The news has made borrowing more expensive for banks:

Via Bloomberg:

Corporate and sovereign credit risk indicators jumped to the highest level in 10 months, and the rate banks say they pay for three-month loans in dollars climbed for the 11th day..

The London interbank offered rate, or Libor, for such loans advanced to 0.536 percent, the highest level since July 7, from 0.510 percent yesterday, according to data from the British Bankers' Association. The dollar Libor-OIS spread, a gauge of banks' reluctance to lend, widened to the most since July 16.

The Euro-zone financial turmoil sets up the chance of a double-dip global recession, a fear that last week caused a strong flight out of commodities and commodity currencies which are considered more risky.

If that wasn't enough, markets faced increased tension between North and South Korea, further increasing risk aversion and flight to safe havens like the Yen and US Dollar.

Via Financital Times:

The South Korean won plunged to its lowest level in 10 months on Wednesday as tensions with its northern neighbor escalated.

The won slid and equity markets across Asia tumbled on reports that Kim Jong-il, the North Korean leader, had ordered his military to prepare for combat after Pyongyang was accused by Seoul of torpedoing a South Korean navy vessel.

The news helped to heighten concerns over the global economy that have been fed by the eurozone sovereign debt crisis and worries over further Chinese monetary tightening.

Today's risk aversion helped to boost the Japanese Yen, which is considered a safe haven, and is also bought as investors close out carry-trade positions. That is borrowing in a low yielding currency in order to purchase a higher yielding currency, such as borrowing in Yen and buying Australian Dollars to collect the difference in interest. When investors unwind such trades they buy Yen, increasing its value. The US Dollar, which with its low interest rate has been used for carry trade as well, gained strongly against the commodity bloc of currencies.

We will look at the important market highlights in today's Daily Video Recap.