COVER STORY
Bailout systems are in doubt, writes Karen Kissane in London.
A BLOODBATH on stock exchanges has forced European Commission president Jose Manuel Barroso to admit the sovereign debt crisis was spreading to Spain and Italy and to call for an urgent review of the EU’s failing bailout systems.
But his call exposed continuing divisions among European leaders on how to manage the dramatically intensifying crisis, with both Germany and the Netherlands snubbing Mr Barroso’s request.
Alarmed by the prospect of an American recession and by the failure of European authorities to deal with the woes of the euro, investors rushed to sell. In Britain, the FTSE 100 index fell 3.43 per cent to its lowest level in almost a year in the fifth straight day of heavy selling.
The French stock market fell 3.9 per cent in Paris and the German index 3.4 per cent in Frankfurt. Italy suffered the steepest collapse, with its stockmarket down more than 5 per cent in Milan.
Yields on benchmark Italian and Spanish government bonds were at 14-year highs. A high interest rate means investors believe there is a high risk a government will not pay back its bonds.
It was feared that American unemployment figures, due out overnight, could lead to a further pummelling.
Trader Will Hedden of IG Index told the Daily Mail, “For many traders this week has felt like the start of the banking crisis in 2008.” That year, the collapse of investment bank Lehman Brothers triggered a global financial crisis.
The current panic is linked to fears that Italy and Spain might need massive bailouts to prevent them defaulting on their debt. They are Europe’s third and fourth-largest economies and it is believed the EU’s current bailout mechanisms would not be large enough for the Herculean task, even if all 27 member states did sign off on them.
Concern is also rising about Belgium, which has high debt and has not had a government in more than a year, with Britain’s financial watchdog urging UK banks to reveal their holdings of Belgian debt.
Mr Barroso said there was “a growing scepticism among investors about the systemic capacity of the euro area to respond to the evolving crisis . . . It is clear we are no longer managing a crisis just in the euro-area periphery.”
In a letter to all 27 EU leaders, he urged a “rapid reassessment” of “all elements” of the union’s rescue mechanisms, including the size of the €440 billion ($A589 billion) European Financial Stability Fund and the €500 billion European Stability Mechanism.
The markets fear that individual governments might refuse to unite in taking responsibility for the debt of any bailed-out country that defaults, and are also concerned that any EU action would take months to implement.
Mr Barroso was immediately rebuffed by Germany, which would be the country that would have to shell out if more bolstering were required, a move that would be deeply unpopular with German voters.
“It is not clear how reopening the debate just two weeks after the summit can lead to calming the markets,” said a German Finance Ministry spokesman. But it was reported that German Chancellor Angela Merkel, French President Nicolas Sarkozy and Spanish Prime Minister Jose Luis Rodriguez Zapatero would discuss the crisis overnight.

First published in The Age.

OVER THE CLIFF
LONDON
ALARMED by the prospect of an American recession and by the failure of European authorities to deal with the woes of the euro, investors rushed to sell. In Britain, the FTSE 100 index fell 3.43 per cent to its lowest level in almost a year in the fifth straight day of heavy selling.
The French bourse fell 3.9 per cent in Paris and the German index fell 3.4 per cent in Frankfurt. Italy suffered the steepest collapse, with its stockmarket down more than 5 per cent in Milan.
The bloodbath on stock exchanges forced the European Commission president, Jose Manuel Barroso, to admit the sovereign debt crisis was spreading to Spain and Italy and to call for an urgent review of the European Union’s failing bailout systems.
But his call exposed continuing divisions among European leaders on how to manage the dramatically intensifying crisis, with both Germany and the Netherlands snubbing his request.
Yields on benchmark Italian and Spanish government bonds were at 14-year highs. A high interest rate means investors believe there is a high risk a government will not pay back its bonds.
It was feared that American unemployment figures, due out overnight Sydney time, could lead to a further pummelling.
Trader Will Hedden of IG Index told the Daily Mail: “For many traders this week has felt like the start of the banking crisis in 2008.” That year the collapse of the investment bank Lehman Brothers triggered the financial crisis.
The panic is linked to fears that Italy and Spain might need massive bailouts to prevent them defaulting on their debt. They are Europe’s third-largest and fourth-largest economies and it is believed the EU’s current bailout mechanisms would not be large enough for the Herculean task, even if all 27 member states did sign off on them.
Concern is also rising about Belgium, which has high public debt – about 100 per cent of its GDP – and has been without a government in more than a year. Britain’s financial watchdog has urged its banks to reveal their holdings of Belgian debt.
Mr Barroso said there was “a growing scepticism among investors about the systemic capacity of the euro area to respond to the evolving crisis … It is clear we are no longer managing a crisis just in the euro-area periphery”.
In a letter to all 27 EU leaders, he urged a “rapid reassessment” of “all elements” of the union’s rescue mechanisms, including the size of the €440 billion ($590 billion) European Financial Stability Fund and the €500 billion European Stability Mechanism.
He said a deal forged two weeks ago, which included a new bailout of Greece, was not placating the markets because of “undisciplined communication” and the “complexity and incompleteness of the July 21 package”.
The markets fear that individual governments might refuse to unite in taking responsibility for the debt of any bailed-out country that defaults, and are also concerned that any EU action would take months to implement.
Mr Barroso was immediately rebuffed by Germany, which would be the country that would have to shell out if more bolstering were required, a move that would be deeply unpopular with German voters.
First published in the Sydney Morning Herald.

LONDON
EUROPE has lurched back into financial crisis as Spain and Italy near the red line that triggered emergency bailouts for Ireland, Greece and Portugal.
Spanish and Italian leaders urgently moved to respond to interest rates on their sovereign bonds soaring to nearly 7 per cent, as investors spooked by the US debt crisis became more anxious about Europe’s stragglers.
Spain’s socialist Prime Minister, Jose Luis Rodriguez Zapatero, has delayed his summer holiday to manage the threat. Italian Prime Minister Silvio Berlusconi was due to address both houses of Parliament separately overnight to defend his policies and ward off calls for his resignation.
Italy’s Finance Minister, Giulio Tremonti, called an emergency meeting of Italy’s financial stability committee and was due to meet the head of the euro zone finance ministers’ group, Jean-Claude Juncker, overnight.
Ten-year Spanish bonds rose to 6.45 per cent and Italian bonds to 6.25 per cent, their highest levels since the creation of the euro zone. High interest rates make it difficult for countries to service their debts.
Sovereign bonds are issued by national governments to raise money and finance their debts. If a country is seen as less likely to be able to meet its repayments, its bonds will attract higher interest rates to compensate for the risk.
The trigger for the market alarm is believed partly to be anxiety over the US debt debate between Republicans and Democrats and fears the country might yet lose its AAA credit rating. If the US economy stalls, it will make it harder for struggling European countries to trade their way out of their problems.
Investors are also concerned that the euro zone’s bailout mechanism could not cope with rescuing economies the size of Spain’s and Italy’s. Spain is Europe’s fourth-largest economy, larger than the three earlier bailout targets of Ireland, Portugal and Greece combined. Italy’s national debt is 130 per cent of what it produces each year, the highest of any European country after Greece.
Euro leaders met in Brussels two weeks ago and decided to put together a fund that would allow them to protect countries seen as vulnerable to attack by speculators. But release of money from the European Financial Stability Facility would take months and must be approved by a vote of every national government in the union. “The market is testing the [European Central Bank],” said David Owen, chief European financial economist at investment group Jefferies. “If this bailout fund is not going to be around to buy bonds, then let’s see if the ECB will do it.”
Mr Owen told The Independent several key events this week might bring the crisis to a head, including a Spanish bond auction today and the release of figures on Italian growth and US jobs tomorrow.
“We are on the brink of a major sovereign debt crisis,” said Danny Gabay, of British group Fathom Financial Consulting.
First published in The Age.