Divisions ahead of EU summit

Spanish prime minister Mariano Rajoy said he would ask other EU leaders to allow the bloc's bailout funds or the European Central Bank to stabilise financial markets.

Speaking in parliament in Madrid, Mr Rajoy warned that Spain would not be able to finance itself indefinitely with 10-year bond yields near seven percent.

"The most urgent issue is the one of financing. We can't keep funding ourselves for a long time at the prices we're currently funding ourselves," he told parliament.

The EU's divisions have been more openly displayed since socialist Francois Hollande ousted Nicolas Sarkozy as French president, putting an end to the Franco-German "Merkozy"

leadership duo and challenging Berlin openly to move away from austerity, promote economic growth and mutualise Europe's debts.

Rome and Madrid, now first in the financial markets' firing line, have muscled into the traditional Franco-German axis.

The four leaders held an unusually discordant news conference in Rome on Friday. The pair will try to repair the damage at a working dinner in Paris tonight after the big four countries' finance ministers met late yesterday to try to narrow differences.

French officials said those talks, and a conference call of all 17 euro zone finance ministers today, focused on specific instruments to ease short-term pressure on markets,

such as altering the preferred creditor status of the bloc's future bailout fund, the European Stability Mechanism (ESM).

Berlin, which originally insisted that ESM loans must be senior to private bondholders to protect taxpayers from losses in any debt restructuring, hinted at flexibility on the rule, which has put investors off buying Spanish bonds.

In Rome, Italian prime minister Mario Monti said yesterday he would not simply rubber stamp conclusions at the EU summit and was ready to go on negotiating into Sunday evening if necessary to agree on measures to calm markets.

With Mr Hollande's support, Mr Monti is pushing for the euro zone's rescue funds, backed by the European Central Bank, to be used to bring down Spanish and Italian borrowing costs.

Mr Rajoy would settle for that or the ECB doing the same job by reviving its bond-buying programme. The proposal has run into stiff opposition from Germany, the euro zone's effective paymaster, and has been rejected by Jens Weidmann, the powerful head of the German central bank, the Bundesbank.

Stock markets perked up last week on hopes that the 20th EU summit since the start of the crisis would come up with dramatic measures.

Investors have since thought better of that view.One senior euro zone source said there would be no short-term decisions for market consumption at the summit - no direct recapitalisation of banks by the ESM, and no bond buying.

The euro fell today, with many investors out of the markets before the Brussels meeting.

ECB chief economist Peter Praet gave markets some cheer by telling Financial Times Deutschland there was no doctrine that euro zone interest rates could not fall below the record low of 1 per cent.

Reuters