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Sunday 11 December 2016

EU admits doubts growing over whether debt woes can be solved

Published 04/08/2011 | 05:00

The European Union voiced support for Italy and Spain, which are under attack on financial markets, but acknowledged that investors now doubt whether the eurozone can overcome its sovereign debt woes.

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European Commission President Jose Manuel Barroso said a surge in Italian and Spanish bond yields to 14-year highs was cause for deep concern and did not reflect the true state of the third- and fourth-largest economies in the currency area.

"In fact, the tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis," Mr Barroso said.

He urged member states to speed up parliamentary approval of crisis-fighting measures agreed at a July 21 summit meant to stop contagion from Greece, Ireland and Portugal, which have received EU/IMF bailouts, to larger European economies.

But neither he nor European Monetary Affairs Commissioner Olli Rehn offered any immediate steps to stem the crisis, which has flared again with full force less than two weeks after that emergency meeting.

Slowdown

Italy has borne the brunt of a selloff triggered by the unresolved debt crisis and fears of a global economic slowdown. Its stocks and bonds gained some respite after a further early slump yesterday.

Italian Economic Minister Giulio Tremonti held two hours of emergency talks with the chairman of eurozone finance ministers, Jean-Claude Juncker, in Luxembourg, but neither disclosed anything of substance after the meeting.

The European Commission said after Mr Rehn spoke to Mr Tremonti that Italy was "doing what is necessary to put the country back on track for higher sustainable growth and ensuring fiscal consolidation".

A commission spokeswoman said there had been no discussion of a bailout for Italy, which would overwhelm the bloc's existing rescue funds.

The market turmoil caused alarm in some parts of Europe but apparent insouciance in the bloc's biggest economy.

"Italian and Spanish bond yields rose to their new record highs. This is a very alarming and scary thing," Finnish Prime Minister Jyrki Katainen told public broadcaster YLE. "The whole of Europe is in a very dangerous situation."

Italy's Prime Minister Silvio Berlusconi, closeted with his lawyers over several ongoing trials, was due to address parliament later. His speech was put back until after Italian markets close.

With many policymakers on holiday, there seemed little prospect of early European policy action, although eurozone governments were in telephone contact on the situation.

German Economic Minister Philipp Roesler said Italy and Spain were not even discussed at Berlin's weekly cabinet meeting yesterday which he chaired in place of Chancellor Angela Merkel, who is on vacation and did not call in.

The eurozone's rescue fund cannot use powers granted at last month's summit to buy bonds in the secondary market or give states precautionary credit lines until they are approved by national parliaments in late September at the earliest.

The ECB could reactivate its bond-buying programme, which temporarily steadied markets last year but has been dormant for over four months. Weekly data released on Monday showed it has refrained from doing so despite rumours to the contrary last week.

Italy and Spain could offer new austerity measures to try to placate the markets, but Rome has just adopted a €48bn savings package and Madrid's lame duck government has just called an early general election for November 20.

Shares in banks exposed to eurozone sovereigns, particularly in Italy, have taken a hammering and are having growing difficulty in securing commercial funding.

Italian bank shares rebounded after data showed the Italian services sector contracted by less than expected in July. Shares in Unicredit, among those pummeled in the latest round of the crisis, rose 5pc after Italy's biggest bank easily beat second-quarter net profit forecasts. But the ripples continue to spread.

France's Societe Generale warned shareholders that it may miss its 2012 profit target after taking a €395m pretax charge in the second quarter on its exposure to Greek debt. Its shares fell 7pc.

The Swiss National Bank cut its interest rate target and said it would very significantly increase its supply of liquidity to try to bring down the value of the Swiss franc, which it said has become massively overvalued.

The currency has served as a refuge, along with gold, amid market turbulence driven by anxiety over a slowing US economic recovery and Europe's debt crisis.

Worries about Italy, the eurozone's third-largest economy and second-biggest debtor, have been exacerbated by political instability in Berlusconi's fractious centre-right coalition.

The Italian parliament approved an austerity programme last month but doubts have lingered about a weakened government's ability to enforce the cuts, and about the lack of structural reforms to boost Italy's miserable growth rate.

"For both Spain and Italy, the 7pc level in yields is the one everyone is focused on," said West LB rate strategist Michael Leister.

Yesterday, Spanish and Italian 10-year yields stood respectively at 6.24pc and 6.10pc. The gap between them has narrowed as Italy has overtaken Spain as the main focus of market concern about debt sustainability. (Reuters)

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