Europe continues to sink into the abyss. Portugal, Ireland, Greece, Spain, Italy ... amazing they have not been bought up by the Chinese
July 12, 2011 9:10 pm
By Guy Dinmore in Rome and Joshua Chaffin in Brussels
Italy’s borrowing costs soar
Italy’s borrowing costs soared to their highest level in over a decade amid highly volatile trading as market contagion from Greece forced Silvio Berlusconi to appeal for national unity and “sacrifices” to cut the nation’s debt mountain.
“We are in the front line of this battle,” Mr Berlusconi said, describing a crisis that threatened all of Europe and the future of its common currency.
The Italian prime minister’s appeal – the most sombre in his three years in charge of his centre-right government – was intended to rebut widespread criticism in the Italian media and the markets that his coalition was rudderless and divided by disputes between him and Giulio Tremonti, finance minister.
“We have to eliminate any doubts over the efficacy and credibility of our budget,” Mr Berlusconi said, insisting that the €40bn package would eliminate Italy’s budget deficit by 2014.
Opposition party leaders in Rome pledged their co-operation in parliament to pass the government’s three-year austerity programme by Friday in time for a possible emergency summit of EU leaders in Brussels that day.
“This would be a record in Italian history,” Enrico Letta of the opposition Democrats told the Financial Times. “Never before has a budget been passed in five days.”
Italian banking sector shares plummeted further at the opening of trading on Tuesday and its benchmark 10-year bond yields hit a euro-era high of 6.09 per cent before markets recovered substantially on news that Mr Tremonti was returning early to Rome from Brussels for emergency talks with the opposition.
Under media fire for spending too much time on dealing with his media empire’s own financial woes, Mr Berlusconi also rushed back to Rome after cancelling a trip to watch his AC Milan football club in training.
A relatively successful sale by the Italian Treasury of €6.75bn of 12-month bills – albeit at the highest yield for three years – calmed markets. Some traders said they believed China had stepped in.
France is also being affected by the market volatility as the premium it pays for debt over Germany hit a new euro-era high on Tuesday. French 10-year yields were 0.7 percentage points higher than equivalent German ones.
And Irish debt was downgraded to junk by Moody’s, which lowered its rating on the embattled country one notch to Ba1, saying it was likely to need a second bail-out.
Mark Schofield, head of interest rate strategy at Citi, said: “France is now trading like Spain and Italy did [before this week].”
In Brussels, finance ministers agreed late Monday night to enhance the flexibility of eurozone’s €440bn temporary bail-out fund – a move that was widely interpreted as a signal that the fund would be allowed to begin buying distressed government bonds in secondary markets.
That approach – long rejected by Germany – would allow Greece to erase part of its sizable debt burden. In hopes of bringing further relief, finance ministers also pledged to lower interest rates and extend debt maturities.
Hopes were raised that a new and more comprehensive bailout package for Greece was at hand after Herman Van Rompuy, European council president, sounded out member states about holding an emergency summit on Friday.
But in spite of the progress, diplomats said that it was not clear if a detailed package could be readied in time.