Spain, Italy demand that ECB buys up their debt

SPAIN and Italy yesterday appealed to European policy makers to step up their response to the financial crisis, after a €100bn lifeline for Spanish banks failed to calm markets.

The leaders of southern Europe’s biggest economies went on the offensive as bond yields jumped after the announcement of a bail-out for Spanish banks intended to quell concern over the countries’ finances. The decline wiped out the effects of €1-trillion in European Central Bank (ECB) loans for euro-zone banks that had held yields in check since December.

Spanish Prime Minister Mariano Rajoy told the Spanish parliament yesterday he would “battle” central bankers refusing to buy debt from peripheral nations. Mr Rajoy published a letter to European Union (EU) leaders calling for the ECB to buy debt from the countries struggling to shore up their finances. “That is the battle we have to wage in Europe. I am waging it.”

Italian Prime Minister Mario Monti told parliamentarians in Rome yesterday Europe faced a “crucial” moment.

Spain’s 10-year yields fell two basis points yesterday to 6,69%, following a surge after the bail-out. Italian bonds also strengthened after slumping the previous two days.

“The crisis will inevitably roll on to the next domino, and that’s Italy,” James Nixon, chief European economist at Société Générale in London, said.

“The southern European economies

are effectively in free fall and market appetite for southern European debt is rapidly drying up. I can’t see anything to turn that dynamic around.”

Mr Monti said the EU did not have the time to wait for austerity plans to stabilise borrowing costs and officials had to act to support growth. The Italian economy shrank 0,8% in the first quarter, compared with 0,7% in the previous quarter and a 0,3% contraction in Spain in the first quarter.

Italy’s borrowing costs surged at a sale of €6,5bn of one-year Treasury bills yielding 3,97%. One-year paper paid 2,34% at the previous sale on May 11.

“Above all, Europe needs more growth,” Mr Monti said. The single-currency zone was “in a particularly intense and particularly crucial” situation, he said.

Spiralling borrowing costs and shrinking output are opening divisions among EU leaders who face a series of hurdles in the coming days as bond investors question their ability to hold the euro zone together.

Italy is due to sell another €3bn of bonds today while international consultants are due to report on the extent of Spanish banking losses by next Thursday.

The European Commission forecasts that Spain will post deficits of 6,4% of gross domestic product this year and 6,3% next year even after €45bn of spending cuts and tax increases.

Greeks will vote on Sunday on whether to back Alexis Tsipras, who wants to scrap the austerity plan dictated by the EU and the International Monetary Fund as a condition of its bail-out.

“The indirect impact of a Greek re-denomination on banks throughout the euro zone could be severe, most notably in programme countries as well as Spain and Italy,” Fitch Ratings said in a report yesterday. Bloomberg