EUROPEAN DIPLOMATS believe the intensity of market pressure on Italy and Spain may prompt EU leaders to contemplate a new round of radical measures to tackle the debt emergency.
As euro zone ministers sought last night to settle deep divisions over a second international bailout for Greece, pressure piled on Italy as its sovereign borrowing costs rose to new records and major Italian banks saw their stocks drop precipitously.
German chancellor Angela Merkel said Rome must demonstrate it was undertaking the budget reforms needed to restore confidence and she was confident it would do so.
The extra yield investors seek to hold Italian and Spanish 10-year bonds instead of German bonds rose to euro-era records. Italian 10-year yields approached the 5.5-5.7 per cent range seen to be crucial for Italy, given the already steep cost of servicing its heavy debt load.
UniCredit, the biggest Italian banks by assets, dropped 6.3 per cent yesterday, adding to a 20 per cent collapse in the past week. The country’s biggest retail bank, Intesa Sanpaolo, also saw its shares fall 7.7 per cent, following a 13.5 per cent decline last week.
Such pressure has rattled the European authorities, as most of the contagion from Greece was previously confined to fellow bailout recipients Ireland and Portugal.
The turmoil comes against the backdrop of renewed tensions with the European Central Bank over suggestions that the ministers might pursue a debt-swap plan for Greece which could lead to a default rating from credit rating agencies.
Austrian minister Markia Fekter said her counterparts wanted to quiz Italy about its management of the situation. “We will [discuss] the IMF decisions and we will also have questions for the Italian minister there,” she said.
Spanish economy minister Elena Salgado also indicated that Italy would be discussed. “Italy can get out of this situation on its own and with the help of all European countries but not with financial aid.”
Although the latest talks remain at an early phase only, diplomatic sources said the contagion impact on Italy and Spain may yet lead to an expansion of the policies adopted to prevent the crisis spreading. Under quiet discussion is the prospect of a wider remit for the European Financial Stability Facility (EFSF) temporary bailout fund, giving it the power to buy sovereign bonds on secondary markets at a discount to their issue price.
Such measures, ruled out months ago when the EFSF’s lending capacity was increased, would reduce the debt burden on countries such as Greece. They would require parliamentary approval in euro zone countries to change the EFSF’s mandate.
In theory at least, such a bond buyback could also be used by countries such as Ireland if the need was perceived to arise.
