Politicians try to stem fears over European debt crisis

EURO ZONE politicians tried to restore confidence yesterday as fears over the escalating debt crisis drove markets to their lowest levels this year.

Italian prime minister Silvio Berlusconi and European Commission president José Manual Barroso said that economic fundamentals in Italy and Spain did not warrant the loss of investor confidence that has occurred in recent weeks.

Speaking during a parliamentary debate in Rome, Mr Berlusconi said “the government and parliament will act, I hope, with a large political and social consensus to fight every threat to our financial stability. Today more than ever, we need to act all together”.

He did not announce any new policy measures.

Earlier in the day his finance minister, Giulio Tremonti, travelled to Luxembourg to meet euro group president, Jean-Claude Juncker. He also spoke to European commissioner for economic and monetary affairs Olli Rehn.

Details of the talks were not disclosed. No new measures were announced following either discussion.

In Brussels, Mr Barroso attributed the most recent flare-up in the crisis to a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis. He described the crisis as a cause of “grave concern”.

He went on to urge governments to implement as a matter of urgency the deal of two weeks ago. That agreement included a second bailout for Greece and a widening of the powers of the rescue fund from which Ireland, Greece and Portugal receive aid. Mr Barroso did not propose additional measures to address the crisis beyond those agreed on July 21st.

Meanwhile, in Spain, prime minister José Luis Rodríguez Zapatero delayed his holiday to discuss the crisis with his finance minister Elena Salgado.

The loss of investor confidence in Spain in recent weeks has triggered the sell-off of its government bonds, which pushes up the yield (the effective interest rate) on these bonds.

No new policy initiatives were announced in Madrid, but Mr Zapatero said his cabinet would meet in three weeks to discuss additional measures.

An auction of €3.5 billion of Spanish government bonds is scheduled to take place this morning.

Yesterday’s calming words from European leaders may have had some impact on the sovereign debt market. Yields on Italian and Spanish government bonds fell slightly but remained near highs for the euro era.

They both closed well above 6 per cent, a level many observers believe to be a trigger point for an accelerating loss of confidence.

Irish Government bond yields changed little yesterday. They closed at 10.6 per cent.

Separately, the Department of Finance published figures on exchequer spending and revenues in July. Both grew in the first seven months of the year compared to the same period in 2010.

While movements in euro zone government bond yields were small compared to recent days, share prices fell sharply in most markets globally.

This was driven by growing evidence that global economic recovery is faltering. A weaker economy leads to lower company profits and this usually causes investors to sell shares and buy assets perceived to be less risky.