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.