SPANISH AND Italian politicians scrambled yesterday to find a fresh response to the debt crisis engulfing the two countries as their borrowing costs hit new euro-era highs.
José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, delayed a planned summer holiday amid growing fears Madrid could become the latest European government to require a bailout.
In Rome, finance minister Giulio Tremonti and regulators convened an emergency session of Italy’s financial stability committee. Mr Tremonti is due to meet Jean-Claude Juncker, head of the group of euro zone finance ministers, in Luxembourg today to discuss the burgeoning crisis.
With Italy’s borrowing costs soaring to new euro-era highs, Silvio Berlusconi has been forced to break a month of near-total silence to defend his economic policies and prevent Europe’s sovereign debt crisis from transforming into a full-blown political emergency for his government.
The prime minister is to address both houses of parliament separately today, aware that market pressure is translating into growing calls for him and Mr Tremonti to resign.
Consensus is also building among economists and in the ranks of Mr Berlusconi’s own coalition that the €48 billion deficit-reduction package passed by parliament last month is insufficient and that Mr Tremonti should impose extra measures after the summer recess.
The flurry of activity yesterday came against the backdrop of another big sell-off in markets. Yields on benchmark 10-year Spanish and Italian bonds peaked at 6.45 per cent and 6.25 per cent respectively.
The premiums Madrid and Rome pay to borrow over Germany also reached new euro-era highs of 404 and 384 basis points.
Both the yields and premiums are close to levels that pushed Greece, Ireland and Portugal into bailouts. The premium France pays to borrow over Germany also hit a euro-era high of 75 basis points.
Analysts said it was difficult to see what could stop Spanish and Italian rates continuing to climb, particularly in light summer trading. “What can be announced to really break that? It is difficult to see,” said Laurent Fransolet, head of European fixed income research at Barclays Capital.
The sell-off follows continued uncertainty among investors about whether the European bail-out mechanism is big enough to deal with either Spain or Italy.
It has been heightened by worries about the possibility of recessions in the US and Europe, which has led to frenzied buying of perceived haven debt including Germany, the US and Britain.
German 10-year yields dipped below the domestic rate of inflation briefly yesterday, for the first time since at least 1960. US 10-year yields hit new year-lows of 2.65 per cent.
In Spain, government ministers and officials dismissed the tensions in the bond markets as “transitory” and “speculative”.
Like the European Commission, they ruled out the idea of a bailout for Spain.
Shares in Italian banks dropped sharply yesterday again, with Unicredit and Intesa Sanpaolo leading a 2.5 per cent drop in the FTSE MIB index of shares in Milan. Spanish shares dropped 1.2 per cent.
Fergal O’Leary of Dublin fixed income firm Glas Securities said while Irish bonds had seen a “positive” increase in turnover, Italy and Spain have been coming under pressure.“To put it in context, Ireland initially received its aid package at a cost of about 5.8 per cent,” he said. – (Copyright The Financial Times Limited 2011)
