Italy and Spain in firing line as euro's fate hangs in the balance

[Slack lines]

Italy and Spain face further attacks from anxious investors amid fears for the future of the euro. Above, Giulio Tremonti, the finance minister who announced Italy's latest austerity package on 15 July. Photograph: Filippo Monteforte/AFP/Getty Images

 

Eurozone leaders are braced for another battering from financial markets this week, amid growing fears that the spiralling sovereign debt crisis is threatening the future of the single currency.

 

"It's likely to be a very confused and volatile week, with mixed messages from markets and policymakers," said Sony Kapoor, director of the Brussels-based thinktank Re-Define.

 

After Italy was forced to bring forward austerity plans last week to placate anxious bond investors, European council president Herman Van Rompuy called leaders to an emergency summit this Thursday.

 

The results of "stress tests" by the new European Banking Authority revealed on Friday that eight banks were vulnerable, and must raise €2.5bn (£2.2bn) to cushion themselves against potential losses.

 

The EBA did not calculate the impact of a default by Greece or other vulnerable eurozone countries, but it released detailed data about banks' holdings that will allow analysts to make their own assessment. "Everybody's sitting up crunching numbers," said one market insider.

 

Matt Spick, banking analyst at Deutsche Bank, said: "We expect the sector to still be at the mercy of macro issues."

 

Unless Thursday's summit results in concrete announcements about how to contain the crisis, analysts are warning that anxious investors will continue to target Italy and Spain.

 

Neil Mellor, of BNY Mellon, said: "Everyone expects some sort of default to come about but in the meantime contagion is rife."

 

Italy saw 10-year-bond yields shoot up to their highest level since the foundation of the single currency last week, before finance minister Giulio Tremonti forced through new spending cuts and tax rises. Politicians have been struggling to reach a deal on a new bailout for Greece. Germany's Angela Merkel has insisted that private sector investors must pay part of the price by taking a loss on Greek bonds.

 

But there is no consensus on how this "private sector involvement" would work –European Central Bank president Jean-Claude Trichet claims there are 36 proposals under discussion.

 

With the financial panic now hitting Italy, and funding costs for banks rising, leaders are under mounting pressure to come up with a long-term rescue plan for the entire eurozone.

 

That could mean beefing up the European financial stability facility - the bailout fund created last year. The EFSF has the power to issue bonds and lend the money to crisis-hit economies; but it is much too small to rescue Spain or Italy, and it cannot buy embattled countries' bonds directly, in the event of a crisis.

 

Jürgen Michels, of Citigroup, warned that any change in the rules for the EFSF would have to be passed by national eurozone parliaments, which could take too long to tackle an emergency over the summer. "Only in situations of emergency are the individual member countries able to overcome the divergent national interests," he said in a research note.

 

"As a result, we have seen only ad-hoc emergency measures so far, mainly designed to deal with problems in individual member countries. Hence, with the warnings that the euro as a whole is at risk now, a more far-reaching ad-hoc emergency measure looks likely to us, but we still do not expect a comprehensive programme any time soon."

 

Kapoor said: "On the single biggest source of risk, which is sovereign debt, the policy remains as fraught and unresolved as ever."

guardian.co.uk

[Newt]

Ah - the old Chinese curse, "May you live in interesting times". The recent months surely qualify.

 

Add in the weather problems hurting Japan (with a major typhoon due to hit them in a few days) , similar expensive issues in China, and the US Congressional squabbling over raising our debt limit so we don't go into default by early August on some financial things, and it begins to look like a melt-down is more likely than not.