European crisis deepens as Spain, Italy hit

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.