Europe rushes to ease 'unwarranted' tension on Italy, Spain

3rd August 2011, Comments 0 comments

EU executive chief Jose Manuel Barroso moved to soothe financial markets and ease "unwarranted" pressure on economic giants Italy and Spain as Europe scrambled Wednesday to ward off fresh euro turmoil.

After a day of drama that saw borrowing costs for Italy and Spain soar to record heights, bond markets steadied as the premiers of Europe's third and fourth biggest economies responded to renewed pressure over their strained public finances.

Prime Minister Jose Luis Rodriguez Zapatero cut short his holidays and Italian Prime Minister Silvio Berlusconi was to address parliament after his Finance minister Giulio Tremonti rushed to Luxembourg for emergency talks with eurozone chief Jean-Claude Juncker.

Euro powerhouse Germany played down the turmoil, with government spokesman Christoph Steegmans saying "there is no reason to fret".

A finance ministry official said market movements were "amplified" because summer trading was at a low level and that Berlin was confident reforms put in place by Rome and Madrid would convince the markets.

But there were calls for action from the European Central Bank.

"We don't really understand the absence of anyone imposing their criteria and calming the markets," said Angel de Molina Rodriguez, director of analysis at Spanish brokerage Tressis.

"If they don't take more serious measures to chase out the speculators via a bond purchase or concerted action with other central banks ... at least they can send a message to say that this cannot carry on."

Stepping in, Barroso said market pressure was "clearly unwarranted on the basis of economic and budgetary fundamentals" in Italy and Spain and "the steps that they are taking to reinforce those fundamentals."

But he vowed to speed up plans to tighten governance among the 17 nations using the euro -- agreed at an emergency summit only two weeks ago called to stop Greece's debt crisis spreading to Italy and Spain.

This week's renewed tensions reflected growing concern "about the systemic capacity of the euro area to respond to the evolving crisis," Barroso said.

The extraordinary July 21 summit agreed a new 160-billion-euro ($226 billion) bailout of Greece which, for the first time, took the risk of involving the private sector -- meaning banks and pension funds with Greek debt would incur losses.

Moving to reassure markets already edgy over US debt woes and stagnant growth, Barroso reiterated that private investor involvement in a euro rescue was "a unique solution" to end the crisis in Greece.

It would not be "a standard feature of the euro areas crisis management," he said.

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.

Barroso also reiterated that among crisis response measures agreed at the July summit were new powers for its rescue fund, the European Financial Stability Facility (EFSF), and reform of euro governance structures.

"It is essential, therefore, that we move forward rapidly with the implementation of all of that has been agreed ... and send an unambiguous signal of the euro areas resolve to address the sovereign debt crisis with the means commensurate with the gravity of the situation."

As the EFSF's new wider role requires approval by some national parliaments, Barroso said he was asking eurozone heads of state and government to ensure actions were "taken without delay."

The Luxembourg talks between Juncker and Tremonti offered little but an enigmatic pledge to "continue our meditation."

"This is so typical of their inability to communicate and coordinate," said an EU diplomat of the eurozone leaders, who have been repeatedly criticised for failing to address the euro crisis with a single voice.

© 2011 AFP

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