Europe panics as Italy teeters

Updated: 2011-07-13 07:51

By Fu Jing and Stefaan Van Kerchove (China Daily)

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BRUSSELS - Panic and fear spread through European markets on Tuesday, as Italy and Spain seemed on the verge of being thrust into the debt crisis after investors dodged their bonds.

The Italian government is calling for an emergency meeting to deal with the confidence crisis while the Paris-based Organisation for Economic Co-operation and Development (OECD) insisted that the situation in Europe's third-biggest economy is "different" from the debt problem of Greece.

European stocks tumbled on Tuesday. Italian bank shares suffered heavy losses and the euro was sinking to a four-month low of $1.38 by mid-morning in Europe.

Observers said the fears were contagious, partly because EU finance ministers have decided to take no substantial action to help achieve financial consolidation in Greece when they meet on Monday, leaving the euro vulnerable.

Italian bonds fell for a seventh day and the country's stocks dropped to the lowest in more than two years as Italy prepared to sell 6.8 billion euros ($9.4 billion) of government bills on Tuesday. Warnings from Moody's Investors Service Inc and Standard & Poor's Financial Services LLC over Italy's ability to reduce its debt, coupled with infighting in Prime Minister Silvio Berlusconi's government over a budget cut plan, fueled the sell-off, according to the Wall Street Journal.

The Financial Times reported that Giulio Tremonti, Italy's finance minister, was due to chair an emergency meeting of government and opposition leaders on Tuesday in an effort to secure swift passage of his austerity package through the parliament.

Italian officials are hoping that a rare display of bipartisan unity will stem the collapse of bank stocks on the Milan bourse, calm debt markets that have driven Italian bond yields to their highest levels in a decade and ease pressure on the euro.

Angel Gurria, secretary-general of the OECD, dismissed the fears about Italy at a news conference in Brussels on Tuesday. Responding to China Daily, he said the Italian crisis is not about economic fundamentals, "as we have known the Italian numbers for long time; we knew them last week, and we also knew them six months ago".

Gurria said what happened over the weekend was not a change in Italy's economic situation but a "lack of coordination between the (Italian) prime minister and the minister of finance", which upset the financial markets.

But Gary Jenkins, head of fixed-income at Evolution Securities Ltd, told the Financial Times that Italian bond yields are nearing "disaster". Greece, Ireland and Portugal all sought international assistance after their 10-year yields rose to more than 7 percent.

Italy has more than 500 billion euros of bonds maturing in the next three years, about twice as much as the 256 billion euros extended to Greece, Ireland and Portugal in their three-year aid programs.

At almost 120 percent of the gross domestic product, Italy's debt is the EU's second-largest after Greece's. Its 1.8 trillion euros of borrowing in nominal terms is more than the combined debt of Greece, Spain, Portugal and Ireland.

The surge in Italy's borrowing costs, if sustained, will increase its financing cost, which the government estimates will total about 75 billion euros this year, or almost 5 percent of GDP. That figure is expected to rise to 85 billion euros by 2014.

The new fears over Italy came while the Paris-based OECD warned the same day that Belgium's high public debt and the need to anticipate the cost of its aging population require urgent fiscal consolidation, though the country has emerged from the global financial crisis faster than the eurozone as a whole.

The OECD's Gurria said that Belgium suffered only a relatively modest rise in unemployment during the crisis compared with other OECD countries. Nonetheless, the debt-to-GDP ratio increased by 12.5 percentage points to 97 percent of GDP, derailing plans to prefund future financing needs.

"Belgium's economy weathered the crisis relatively well, but it is nevertheless at a crossroad," Gurria said.

He added that while the crisis had only a modest impact, it has increased the urgency for a credible consolidation plan to reduce public debt in the coming years to secure fiscal sustainability.

To achieve this without hurting long-term growth prospects, Gurria said, Belgium should cut spending at all levels of government while reforming the tax system. "Without such a plan, Belgium could continue facing higher borrowing costs owing to financial market concerns," said Gurria.

China Daily


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