Merkel talks with Sarkozy today as debt crisis spirals
Obama alarmed as new Bundesbank chief says Europe needs to make a final decision on further integration
MARKETS are expected to be extremely volatile today ahead of crunch talks between German Chancellor Angela Merkel and French President Nicolas Sarkozy, who are in danger of losing control over the fast moving eurozone debt crisis.
Speculation of a Greek default continues to hang over markets and if a substantial statement is not released today after the Merkel/Sarkozy teleconference, markets may plunge yet again.
Ahead of the talks President Obama said European leaders needed to show they were taking responsibility for the crisis.
Fresh pressure was applied meanwhile by the president of the Bundesbank, who said Europe needed to make a final decision on further integration or simply go back to national budgeting.
Jens Weidmann called for bolder action from EU governments. In a speech in Cologne, he warned that a decision "would have to be taken soon" on either a "big jump" towards political union or a return to a monetary union based strictly on countries taking responsibility for their own finances.
The middle way of pooling responsibility but retaining national fiscal policies "threatens to collapse under its own inconsistency", he said.
A source of major pressure in the crisis is the US, which is becoming concerned that the crisis shows no sign of abating. This Friday, in an unusual development, US Treasury Secretary Timothy Geithner will join European finance ministers for talks in Poland.
Ms Merkel said in a radio interview that Europe was doing everything in its power to avoid a Greek default.
Asked yesterday if a Greek default would doom the euro, she said: "We are using all the tools we have to prevent this. We need to avoid all disorderly processes with the euro."
Pressure on Italy is also continuing, despite the ECB propping up its bond market.
The country suffered the latest blow to efforts to continue tapping the bond markets and avoid an EU/IMF bailout when investors shunned a sale of new government bonds.
A lack of appetite for its bonds forced the Italian government to pay a record 5.6pc to borrow over five years at a debt auction.
Italy did sell €6.485bn of the bonds but the price is a record high and unsustainable for a country with €1.8 trillion of debt to service and roll over in the markets.
Borrowing costs for both Italy and Spain rose relative to Germany after the auction, and last night Fitch warned that Spain is now at risk of a ratings downgrade.
The weakness in the bond market spilled over into equities early in the day but that market did see significant recovery which began later with reports that France and Germany were set to make a fresh statement on the Greek crisis that halted the earlier falls. By the time that was denied, strong French denials that its banks are at risk had lifted prices further.
By the close the momentum in French bank shares was the big story, but its increasingly linked to sentiment regarding Greece.
French banks, hardest hit in a dramatic sell off on Monday, saw some of the best recoveries.
Societe Generale was up 15pc after falling 8pc Monday, rival BNP Paribas shares rose 7.2pc after losing 12pc the previous day. "It's all about Europe," Tom Wirth, senior investment officer for Chemung Canal Trust, said in a phone interview.
Influential Mohamed El-Erian of PIMCO warned of a looming global slowdown. "We're getting close to a full-blown banking crisis in Europe," Mr El-Erian, chief executive officer and co-chief investment officer, said in a radio interview with Bloomberg.