Italy, eurozone in 'meditation' as debt crisis deepens

3rd August 2011, Comments 0 comments

Italian Finance Minister Giulio Tremonti and eurozone chief Jean-Claude Juncker had little to offer after talks on Wednesday as Italy and Spain risk being swamped by the eurozone debt crisis.

Despite mounting pressure on debt bonds issued by Italy, the European Union's third-biggest economy, the two officials emerged with little but an enigmatic pledge to "continue our meditation."

But in Rome and Madrid, the Italian and Spanish prime ministers were sending strong signals that they are acting in response to the pressures.

Global markets are in a state of anxiety over debt and growth prospects in the eurozone and United States, despite a last minute US deal to raise the borrowing limit and cut spending, signed by President Barack Obama.

Investors are again highly nervous about eurozone debt, barely two weeks after an emergency eurozone summit in Brussels struck a deal for a second bailout of Greece intended also to stop contagion to Italy and Spain.

Emerging after an almost two-hour meeting, Juncker who is Luxembourg prime minister and heads the 17-nation eurogroup of finance ministers, said: "We had a long discussion visiting all the problems the euro-area is facing."

"We will continue our meditation in calm."

"I agree," added Tremonti. "It was a long and fruitful discussion."

The talks followed a new day of drama on financial markets as Italy and Spain faced soaring borrowing costs that threaten to sweep the eurozone's third and fourth-biggest economies into a widening Greek-style debt crisis.

As global stocks tumbled on fears of a resurgence of euro problems, Spanish Prime Minister Jose Luis Zapatero delayed vacation plans and Prime Minister Silvio Berlusconi was to address parliament in a bid to unite Italy in efforts to stabilise the country's strained public finances.

The eurozone crisis has already sent Greece, Ireland and Portugal running for bailouts from the European Union and International Monetary Fund.

But Italy is twice as big as the three combined and has a public debt that amounts to 120 percent of its gross domestic product, way above the EU limit of 60 percent.

"Despite numerous attempts, the European authorities have still not done enough to satisfy a sceptical bond market and the debt crisis looks far from over," said Juliet Tennant, economist at Goodbody Stockbrokers in Dublin.

The July 21 summit agreed a 160-billion-euro ($226 billion) rescue of Greece -- involving the private sector for the first time -- and also agreed to boost the scope of its rescue fund, the European Financial Stability Fund (EFSF).

Amid growing concerns that the 440-billion-euro fund would be insufficient to rescue countries the size of Italy or Spain, European Union President Herman Van Rompuy stepped in on Tuesday to try to reassure markets.

"We cannot underline enough that the situation in Greece is unique and is not comparable to those in other eurozone countries," Van Rompuy wrote in a commentary in Le Monde newspaper.

"Current evaluations of risk on the markets do not correspond at all to fundamentals and it is ridiculous that ... these countries are considered the most likely to default on loan obligations," he added.

Sources contacted by AFP at the Italian government, the European Commission and in Juncker's entourage were tight-lipped late on Tuesday about what action Rome could take.

Financial market contagion is driving demands for a dramatic centralisation of economic management by eurozone members.

But a spokeswoman for Economic Affairs Commissioner Olli Rehn said that rescue planning for Italy, Spain and Cyprus was "certainly not on the table."

However, "all scenarios have become a possibility, even the most dramatic ones," said Rome economics professor Pierpaolo Benigno.

© 2011 AFP

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