Barroso asks leaders to stand firm on pledges

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Commission President José Manuel Barroso voiced support yesterday (3 August) for Italy and Spain – both under attack on financial markets – but acknowledged that as EU leaders have been slow to deliver on promises, investors now doubt whether the euro zone can overcome its sovereign debt woes.

Barroso said a surge in Italian and Spanish bond yields to 14-year highs was cause for deep concern and did not reflect the true state of the third and fourth largest economies in the currency area.

On Wednesday, Spanish and Italian 10-year yields stood respectively at 6.24 and 6.10 percent. The gap between them has narrowed as Italy has overtaken Spain as the main focus of market concern about debt sustainability.

"In fact, the tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis," Barroso said in a statement.

He urged member states to speed up parliamentary approval of crisis-fighting measures agreed at the 21 July euro zone summit meant to stop contagion from Greece, Ireland and Portugal, which have received EU/IMF bailouts, to larger European economies.

“It is essential, therefore, that we move forward rapidly with the implementation of all of that has been agreed by the Heads of State and Government and send an unambiguous signal of the euro area’s resolve to address the sovereign debt crisis with the means commensurate with the gravity of the situation,” Barroso said.

The euro zone's rescue fund cannot use new powers granted at last month's summit to buy bonds in the secondary market or give states precautionary credit lines until they are approved by national parliaments in late September at the earliest.

But neither Barroso nor European Monetary Affairs Commissioner Olli Rehn offered any immediate steps to stem the crisis, which has flared again with full force less than two weeks after that emergency meeting.

With many policymakers on holiday, there seemed little prospect of early European policy action, although euro zone governments were in telephone contact on the situation.

German Economics Minister Philipp Roesler said Italy and Spain were not even discussed at Berlin's weekly cabinet meeting on Wednesday which he chaired in place of Chancellor Angela Merkel, who is on vacation and did not call in.

Berlusconi's cabinet did not discuss the market turmoil either and a German government spokesman said Berlin saw no reason for alarm over the sell-off of Italian stocks and bonds and was focused on implement the latest euro zone summit decisions.

The European Central Bank could reactivate its bond-buying programme, which temporarily steadied markets last year but has been dormant for more than four months. Weekly data released on Monday show it has so far refrained from doing so despite market rumours to the contrary last week.

Italy and Spain could offer new austerity measures to try to placate the markets, but Rome has just adopted a 48 billion euro savings package and Madrid's lame duck government has just called an early general election for 20 November.

EURACTIV with Reuters

"Italian and Spanish bond yields rose to their new record highs. This is a very alarming and scary thing," Finnish Prime Minister Jyrki Katainen told public broadcaster YLE. "The whole of Europe is in a very dangerous situation."

"Bank funding remains stressed for southern Europe and remains a key source of risk for bank earnings, ability to lend and a drag on economic recovery," Huw van Steenis, analyst at Morgan Stanley in London, said in a note. "The risk of a credit crunch in southern Europe is growing."

France's Societe Generale warned investors it may miss its 2012 profit target after taking a 395 million euro pretax charge in the second quarter on its exposure to Greek debt. Its shares fell 7 percent.

The Swiss National Bank cut its interest rate target and said it would very significantly increase its supply of liquidity to try to bring down the value of the Swiss franc, which it said has become massively overvalued.

The currency has served as a refuge, along with gold, amid market turbulence driven by anxiety over a slowing U.S. economic recovery and Europe's debt crisis.

"For both Spain and Italy, the 7 percent level in yields is the one everyone is focused on," said West LB rate strategist Michael Leister. "Although we're still quite a decent amount away from that, any break of the 6.50 percent level is going to be a catalyst to get to those higher rates."

Since the euro zone’s debt crisis erupted last year, the region’s governments have aimed to limit it to Greece, Ireland and Portugal, which have so far signed up to bailouts totalling almost 400 billion euros.

Spain and Italy had managed to keep under control their access to market funding through fiscal reforms. But in the last two weeks, the situation has worsened. Because of the large sizes of the Spanish and Italian economies, pressure on the euro zone would increase dramatically if those countries eventually needed financial assistance.

Private analysts have estimated a three-year bailout of Spain, based on its projected gross issuance of medium- and long-term debt in 2011, might cost some 300 billion euros - excluding any additional money for cleaning up Spain’s banks. A three-year rescue of Italy could cost twice that.

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