Greek, Italian PMs try to reassure EU leaders

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The new leaders of Italy and Greece sought Tuesday to convince EU partners they can resolve debt crises now threatening France while a debate raged over the role of the European Central Bank.

Italian Prime Minister Mario Monti went into talks with European Commission president Jose Manuel Barroso before meeting EU president Herman Van Rompuy in his first foreign trip in order to present his debt-fighting plan.

Monti, who came to power after Silvio Berlusconi resigned under pressure from the markets, is pushing through an austerity and economic reform programme to slash Italy's 1.9-trillion-euro debt mountain.

Meanwhile in neighbouring Luxembourg, new Greek Premier Lucas Papademos met the chief of eurozone finance ministers Jean-Claude Juncker as he tries to convince lenders his unity government will commit to the reforms needed for the release of 8.0 billion euros in urgently-needed bailout aid.

Juncker said he was optimistic that all Greek coalition partners will abide by EU demands for a signed letter committing to reforms in time for a eurozone meeting next week, despite reluctance from the conservative party.

"Would there be no cross-party agreement, that disbursement of course could not take place," Juncker warned.

The flurry of meetings came on the eve of new proposals to be unveiled by the European Commission to tighten fiscal discipline in the eurozone and raise the possibility of issuing joint bonds to pool debt among the 17 euro nations.

The tensions on the bond markets persisted on Tuesday as Spain's borrowing costs soared at its first debt auction since the victory of conservative leader Mariano Rajoy in weekend elections.

The bond market pressure has fueled calls for the ECB to act as a lender of last resort to put an end to a crisis that has festered for two years and now threatens the world with recession.

The US ambassador to the EU, William Kennard, weighed in on the debate, saying Washington was "watching very intently what the ECB is able to do and the potential for it to do more."

He added: "The outcome of this crisis is pretty unpredictable. We don't know how it will be solved. I don't think anybody can predict how it will be solved."

The ECB has bought billions of euros of government bonds issued by struggling nations in the secondary markets but the bank and Germany are opposed to a bigger role for fear of an inflation blowout.

"If it took on a lender of last resort role for highly indebted member states, it would overshoot its mandate and call into question its independence," said Jens Weidmann, head of the Bundesbank, Germany's central bank.

"There would be significant stability risks attached to this path," he said.

France has pushed for the ECB to step up its role and proposed that the Frankfurt institution be allowed to lend funds to the eurozone's bailout fund without limits.

The French government is fighting to defend the country's prized triple-A credit score but ratings agency Moody's has warned that higher borrowing costs, slowing growth and the eurozone crisis were putting it at risk.

The spotlight has also turned on the United States after a US Congress "supercommittee" conceded defeat Monday in its bid to reach a deal to cut US deficits by $1.2 trillion over 10 years due to political bickering.

US President Barack Obama held out hope that lawmakers could reach a new deal and tried to reassure the markets by saying that despite a ballooning national debt of more than $15 trillion, there was no imminent threat of a US default.

"The question right now is whether we can reduce the deficit in a way that helps the economy grow -- that operates with a scalpel, not with a hatchet," said Obama, who faces a re-election battle next year.

The United States is in the crosshairs of credit ratings agency over its massive debt. Standard & Poor's jolted Washington by downgrading US debt in August.

Despite the fresh worries, Asian stock markets closed mixed on Tuesday while European shares rebounded slightly at mid-day after recent sustained losses.

© 2011 AFP

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