Austrian minister stokes fears of Italian bailout

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Austria's outspoken finance minister said Italy may need a financial rescue because of its high borrowing costs, drawing a sharp denial yesterday (12 June) from Italy's "worried" Prime Minister Mario Monti.

Maria Fekter's assessment of the eurozone's third largest economy stoked investors' fears that Europe is far from ending 30 months of turmoil - a feeling reinforced by Dutch Finance Minister Jan Kees de Jager, who said the eurozone was "still far from stable".

A deal by eurozone finance ministers on Saturday to lend Spain up to €100 billion to recapitalise its banks was seen by many in the markets as yet another temporary fix. Spanish 10-year bond government yields soared to 6.81%, their highest level since the euro's launch in 1999.

Eurozone rescue funds, already stretched by supporting Greece, Portugal, Ireland and soon Spain, might be insufficient to cope with Italy as well, Fekter said in a television interview on Monday night.

"Italy has to work its way out of its economic dilemma of very high deficits and debt, but of course it may be that, given the high rates Italy pays to refinance on markets, they too will need support," Fekter said.

She sought to soften her remarks yesterday, saying she had no indication Italy planned to apply for aid.

Monti, asked by a German television network whether his country would need a bailout, said: "I don't believe so."

Earlier, he called Fekter's comments "completely inappropriate" for an EU finance minister. Eurozone officials said they were deeply unhelpful.

Meanwhile, Monti met the leaders of the parties backing him in parliament and called on them to give their unified support to help Italy through current market turmoil.

Monti said in a statement he was "worried by the situation of emergency" on financial markets, and had told the party chiefs that "cohesion" was needed "to overcome the critical situation and give an image of unity abroad".

His government faces three confidence votes today on legislation to counter corruption, which has been strongly contested by parts of his own coalition.

Amid the cacophony, Italian 10-year bond yields also rose further as the aid deal for Spanish banks failed to ease doubts about Madrid's ability to fund itself, fuelling wider contagion fears.

Barroso calls for banking union

European Commission President José Manuel Barroso, European Central Bank policymaker Christian Noyer and French Finance Minister Pierre Moscovici all called yesterday for swift moves to create a eurozone banking union.

Barroso told the Financial Times that a cross-border banking supervisor, a deposit guarantee scheme and a bank resolution fund could be put in place in 2013 without changing EU treaties.

EU paymaster Germany has so far rejected a deposit guarantee or a resolution fund, saying they would require treaty change.

The Bundesbank weighed in, saying a European banking union could bring advantages only if properly anchored in a fiscal union with powers to stop countries breaking budgetary rules.

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The head of the International Monetary Fund called for "decisive steps" by European policymakers to deal with the region's financial crisis and said carbon taxes could deliver more revenues for countries worldwide with budget constraints.

In a speech yesterday in Washington, IMF Managing Director Christine Lagarde said economic and financial stability was critical to addressing global environmental challenges.

"We need a strategy that is good for stability and good for growth - where stability is conducive to growth and growth facilitates stability," she said.

"This must start with advanced economies, especially in Europe. Policymakers need to take decisive steps to break free of the crisis."

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