Spain, Italy pledge curbs as the cost of credit surges
But Merkel rebuffs pressure from EU partners and the US to underwrite debt or guarantee bank deposits
SPAIN and Italy, under increasing fire in Europe's debt crisis, promised new measures to repair their public finances as their soaring borrowing costs set off new alarm bells ahead of a cliffhanger Greek election.
But German Chancellor Angela Merkel rebuffed pressure from EU partners and the United States for Europe's most powerful economy to underwrite debt or guarantee bank deposits in the single currency area.
Spain's 10-year bond yield hit a euro lifetime high above 7pc yesterday -- a danger level above which Greece, Ireland and Portugal were driven to seek international rescues -- despite last weekend's eurozone agreement to lend Madrid up to €100bn to recapitalise ailing banks.
"It is not a situation that can be maintained over time. and I am convinced that we will continue to take more measures in the coming days and weeks to help bring this rate down," Spanish Economy Minister Luis de Guindos said.
In Rome, Parliamentary Affairs Minister Piero Giarda, in charge of a public spending review, said Italy will seek to cut €5bn in state administration spending this year instead of a previously announced €4.2bn.
The money saved would help fund areas hit by two earthquakes last month.
Moody's Investor Service slashed Spain's sovereign credit rating by three notches to Baa3, just one level above junk, late on Wednesday, citing the government's "very limited" access to international debt markets and the weakness of the economy.
The downgrade added to a sense of emergency in financial markets ahead of an election in debt-plagued Greece on Sunday that could deliver a mandate to an anti-bailout party.
Italy, rapidly coming into the firing line, saw its three-year borrowing costs shoot up to 5.3pc at auction yesterday, the highest since December, despite Germany's strong expression of support for Monti's reforms when he visited Berlin on Wednesday.
Surging Spanish and Italian bond yields reflect investors' concern that the 17-country currency bloc has failed to arrest its 2-1/2-year-old debt crisis and faces potential turmoil after a general election that could put Greece on an unprecedented exit route from the euro area.
French President Francois Hollande said in an interview with Greek television that he wanted Athens to stay in the single currency and it was up to Greek voters to decide what they wished.
"But I have to warn them, because I am a friend of Greece, that if the impression is given that Greece wants to distance itself from its commitments and abandon all prospect of recovery, there will be countries in the eurozone which will prefer to finish with the presence of Greece in the eurozone."
He did not name the countries but German, Dutch and Austrian officials have spoken openly of a possible Greek exit.
In the last opinion polls published before a blackout 10 days ago, the leftist SYRIZA party, which rejects the terms of Greece's EU/IMF bailout, was running neck-and-neck with the conservative New Democracy party, raising the possibility of a radical anti-austerity coalition or another deadlock.
However, battered Greek bank stocks rallied by 20pc on market talk of secret opinion polls showing a government favourable to the bailout agreement was likely to emerge from the election.
"The market sees that a pro-European government which will push ahead with reforms will be formed on Sunday," said Panagiotis Kladis, an analyst at NBG Securities.
Greeks, who have had to endure four years of recession and now have 22.6pc unemployment, have been pulling money out of the banks and stocking up on food ahead of the election, fearing worse turmoil after the vote.
Greece's debt woes have helped push neighbouring Cyprus to the brink of seeing a financial rescue, with officials looking to Europe, Russia and China for the best possible bailout terms.
Mrs Merkel acknowledged that the eurozone crisis, and Germany's role, would be at the centre of attention at next week's summit of the G20 major world economies in Los Cabos, Mexico.
The leaders gather on Monday, a day after the Greek election.
US President Barack Obama, whose re-election prospects in November could be dented by the ongoing euro crisis, telephoned the European Council President Herman Van Rompuy on Wednesday to inquire how European states planned to cope with the outcome of the Greek vote.
"There is a lot of concern in America about the outcome of the Greek elections and how Europe will deal with the results," a European official said.