Euro zone grapples with uncertainty

EUROPEAN UNION:EURO ZONE finance ministers played for time last night as uncertainty about the fate of Italy rocked markets, and as Europe awaited news from Greece on the conclusion of talks on an emergency coalition government.

The upsurge of volatility on markets has prompted European leaders to bring forward the deadline to agree on the expansion of their bailout fund by four weeks to the end of this month.

The discussions are highly complex, however, and the ministers were not aiming to reach a deal last night. A further emergency meeting is likely before their next scheduled talks on November 29th.

The euro zone meeting was overshadowed by the political ructions in Rome, where the premier, Silvio Berlusconi, was clinging to power, and by Greek talks on a new unity government.

The talks came as Paris published a new round of austerity measures, designed to trim €18.6 billion from its budget in 2012 and 2013. The initiative, months before French president Nicolas Sarkozy faces into a difficult election campaign, reflects anxiety about the pressure on the country’s triple-A credit rating.

In European circles, there is considerable concern about the situation in Italy, which has a massive borrowing requirement, but senior euro zone figures sought yesterday to downplay the crisis.

“Italy’s real figures don’t justify this nervousness in markets,” said German finance minister Wolfgang Schäuble. The country’s position was not comparable to that of Greece, he added.

Still, the euro zone ministers wanted to hear detailed proposals from Italian minister Giulio Tremonti about the implementation of a 15-page austerity plan that Mr Berlusconi has submitted to his EU counterparts.

There was no comment to reporters yesterday from Mr Tremonti, whose relations with Mr Berlusconi have soured in recent months.

As the ministers held off on the release of a crucial €8 billion loan to Greece, EU economics commissioner Olli Rehn said certainty was awaited from the country on the talks on the new government.

“It’s now essential Greece restore confidence of its European partners by building a coalition government of national unity,” Mr Rehn said. “To my understanding, this is well under its way.”

At issue in talks on reforming the bailout fund is the mechanism by which the European Financial Stability Facility increases its firepower to €1 trillion from €440 billion without increasing the guarantees it draws from euro zone countries.

“This is an insanely complicated overall process,” said euro group chief Jean-Claude Juncker as he arrived in Brussels. “I don’t expect we’ll come to any decisions today.”

Minister for Finance Michael Noonan said it was clear the European Central Bank would have to continue intervening in sovereign bond markets until the EFSF was ready to take over that task.

“In the meantime, and in parallel, the ECB has a role and must continue to play a role until the EFSF firewall is put in place, whenever that may be,” he told reporters. “And even when it has been put in place, it’s going to be tested. So I think the ECB must carry out a parallel function until it’s quite clear that the new firewall is doing its job.”

In a regular update, the ECB reported that it increased its purchases of euro zone government bonds, buying €9 billion in paper last week in the days after its new president Mario Draghi took office. The presumed target of the bank’s latest interventions was Italy, whose bond yields rose again yesterday to a new record.

The ministers are discussing proposals for the EFSF to provide first-loss insurance on the bonds of distressed euro zone countries when they issue debt to the private markets. There is concern, however, that this could create a two-tier market for euro zone bonds.

Also under examination is whether the EFSF creates a special purpose investment vehicle to seek external investment for euro zone rescues from sovereign wealth funds and private investors.