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EU races to curb euro crisis as Italy, Spain hit

Published on 11/07/2011

The European Union raced on Monday to head off mounting signs that the eurozone debt crisis is spreading to major EU economies, Italy and Spain.

As borrowing costs for Italy and Spain, the eurozone’s third and fourth biggest economies, peaked to record high levels, German Chancellor Angela Merkel stepped in to issue a rare public appeal to a fellow EU nation.

Merkel, speaking as top EU officials held crisis talks in Brussels, urged the Italian parliament to pass an austerity budget amid growing concern it might be dragged into a debt crisis that so far has hit smaller nations — Greece, Portugal and Ireland.

“I think a very important signal, which must be sent by Italy itself, would be the approval of a budget involving the necessary savings and budgetary consolidation,” Merkel told reporters in Berlin.

In Brussels, EU President Herman Van Rompuy met Eurogroup chairman Jean-Claude Juncker and European Central Bank chief Jean-Claude Trichet, ahead of a gathering later in the day of finance ministers from the 17-nation eurozone.

“This is not a crisis meeting, but to coordinate positions,” said Van Rompuy’s spokesman, Dirk De Backer, ahead of the talks.

“The agenda is Greece, not Italy,” he added.

Meanwhile, the EU Internal Markets Commissioner Michel Barnier raised pressure for a partial gag on credit ratings agencies, saying they should not be able to issue ratings on countries being rescued by the EU and IMF.

As market tension rose, Italy’s financial regulator imposed temporary curbs on short selling after shares plunged on fears of contagion from Europe’s sovereign debt crisis, and in Asia the euro fell further on the same concerns.

Held on the back of a roller-coaster week for the single currency, Monday’s talks — to be expanded to the full EU 27 the following day — will focus on the prickly issue of private-sector involvement in a second bailout of Greece, a deal not expected before September.

But eurozone discord over how to bring banks and other private creditors to bear a share in a new rescue, without triggering a default which would ripple across the single currency area, is fuelling tension on nervous markets.

“Certainly we need to move as fast as possible … to make sure that that programme is created as soon as possible,” said Polish Finance Minister Jan Rostowski, whose country holds the rotating EU presidency.

“It’s not good to have it not finalised,” he said of the Greek rescue plan, while saying he was “not at all concerned” about contagion to Italy “which has a fiscal position which is under very good control.”

Initial French proposals for a voluntary rollover of Greek debt — buying new Greek bonds when current bonds come due — appear to have lost favour since a shock warning from Standard & Poor’s ratings agency that even this soft option would be viewed as a default of Greece.

Signs since point to a shift in sentiment, with Germany, the Netherlands and others now favouring a solution that will force the private sector into easing the taxpayer’s pain — whether or not this comes down to a default.

“I think we have to accept that a voluntary contribution is not realistic,” Dutch Finance Minister Jan Kees de Jager said last week.

“If a compulsory contribution gives rise to a short and isolated rating event, then it’s not so bad,” he said, using a term which refers to a default rating.

European leaders have been working for weeks on drawing private bondholders into a Greek rescue tipped as almost as big as last year’s 110-billion-euro bailout.

The plan has the backing of key global finance group, the Institute of International Finance (IIF), which represents banks, insurers and investment funds. It held closed-door talks in Europe last week.

The ECB meanwhile is opposing any Greek default, with Trichet saying full or even partial and short-term default was totally unacceptable.

“No credit event, no selective default, no default. That is the present message of the (ECB) governing council,” Trichet said last week.

The European bank has added further tension by saying that if private sector involvement led ratings agencies to declare Greece in default, it could no longer accept Greek government debt as collateral for loans to Greek banks.

That would probably cause the Greek banking sector to collapse.