Two-tier EU fears grow as Italy ‘days from bailout’
Published 11/11/2011 | 05:00
Italy may only have days to prevent itself needing some kind of outside help as the eurozone debt crisis engulfs even more countries, most alarmingly France.
Markets went into panic last night after Standard & Poor's mistakenly sent out a report suggesting France had already lost its prized AAA rating. It was later withdrawn, but France remains under severe pressure as rumours persist that Europe is heading towards some kind of break-up in the long term.
Markets were also chilled by gloomy forecasts from EU economics commissioner Olli Rehn that Europe is sliding towards recession.
As Italy tries to form a new unity government, headed up by former EU Commissioner Mario Monti, key players are warning that time is short for Italy to avoid needing outside assistance. Yesterday Italy's borrowing costs eased slightly to below 7pc, but remain under pressure.
The country got fresh funds in, based on borrowing for a year, but they cost the country over 6pc.
Klaus Regling, head of Europe's rescue fund, made markets nervous last night when he said: "Italy is running out of time to calm markets."
While most experts believe his fund does not have the resources to keep Italy afloat long term, Mr Regling said he would still talk to Italy. "If a country comes and says, it needs help immediately, then we are ready."
Mr Monti could be installed as early as Sunday, although slippage and a breakdown in talks cannot be ruled out.
Greece has installed a former ECB executive, Lucas Papademos, as its new prime minister in an attempt to push through a major austerity programme.
France, meanwhile, is finding itself increasingly facing higher borrowing costs, as worries grow about its AAA rating. The gap between what Germany borrows at and what France borrows at is at a fresh high.
'The Daily Telegraph' claimed last night France was drawing up plans to create a new breakaway organisation of eurozone countries with its own treaty, parliament and headquarters -- a move which could significantly undermine the existing EU. However, suggestions of breakaways are for now being officially.
France risks becoming the next victim of the sovereign-debt crisis as early as "in the coming weeks", Gordon Brown, the former UK prime minister, also warned yesterday.
"France is in danger of being picked off by the markets in the coming weeks and months," Mr Brown said at an event in Moscow.
The collapse of the eurozone would cause a crash that would instantly wipe out half of the value of Europe's economy, plunging the continent into a depression as deep as 1930s slump, the president of the European Commission has warned.
Jose Manuel Barroso issued his chilling warning as France began diplomatic overtures to create a eurozone vanguard, potentially with fewer than the 17 existing members of the single currency.
Mr Barroso said that if the euro area of the 17 member states or the wider 27-country EU broke apart, the estimated initial cost would be up to 50pc of European gross domestic product (GDP).
"It would jeopardise the future prosperity of the next generation. That is the threat that hangs over us," he said.
In a Berlin speech aimed at tackling head on any support for a smaller elite eurozone compromised of the EU's strongest economies, Mr Barroso warned that the consequence of a split would be a million lost jobs in Germany.
The key nervousness last night was caused by Standard & Poor's, which sent out an erroneous message to subscribers suggesting France's top credit rating had been downgraded.
A downgrade of France's credit rating would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales.