Spain, Italy demand action as debt pressure mounts

Mon Jun 18, 2012 11:54am EDT

MILAN/MADRID (Reuters) - Spain called on Monday for the European Central Bank to fight financial market pressures on the euro zone, and Italy said more must be done to shore up the bloc after the Greek election result failed to ease the strain on both countries.

The cost of borrowing rose for the two big euro zone economies under fire for poor finances, widening the gap between what they would have to pay and what Germany pays.

The yield on Spain's 10-year bond went above the 7 percent widely viewed as unaffordable. Italy's was just above 6 percent.

Spanish Treasury Minister Cristobal Montoro told the Senate during a budget hearing that doubts were lingering about the future of the euro zone. "The ECB must respond firmly, with reliability, to these market pressures that are still trying to derail the joint euro project," he said.

Within a few hours of Sunday's Greek election result - a narrow win for Greek parties committed to a European Union/International Monetary Fund bailout - financial markets were reacting as if nothing had changed.

"We can see that the markets are not convinced," Italian Prime Minister Mario Monti said at a G20 meeting in Mexico, according to Italian news agency ANSA. "We must draw up a definitive and clear road map with concrete actions that make the euro more credible."

Spanish Prime Minister Mariano Rajoy, like Montoro on Monday, has repeatedly called for the ECB to act to defend the euro zone, implicitly wanting it to resume a massive bond-buying program that held down yields of government debt in recent months. The ECB is reluctant to fire up the program again.

Monday's market response underlined the problem facing the euro zone: short-term improvements in the climate do not get away from the fact that finances are perilously tight in the middle of an economic downturn.

"While Greek euro exit fears have ... eased, this (election) outcome does little to alleviate the weak fundamentals that currently weigh on Spain and Italy," Michala Marcussen, an economist at Societe Generale, said in a research note.

Even so, a meltdown at the prospect of a Greek government promising to renege on its commitments and possibly forcing Greece out of the euro zone was averted

Rajoy greeted the election outcome as "good news for Greece, very good news for the European Union, for the euro and also for Spain".

COMPREHENSIVE SOLUTION

For Italy and Spain, the bond market reaction to the Greek vote suggested that the euro zone crisis needs a comprehensive solution before markets can start to build confidence.

Stock and currency markets were also underwhelmed by the Greek results. After an initial rise, Europe's top shares and the euro were weaker.

Skeptics don't have to look far to see why: Spanish banks' bad loans rose to the highest percentage of their outstanding portfolios since April 1994, according to the Bank of Spain.

An audit later this week is expected to show Spanish banks need between 60 billion and 70 billion euros ($75-88 billion) in capital.

There were mixed signals from Germany about whether it would tolerate a slight easing of demands on Greece.

It is also unclear how deep the divisions will be between German Chancellor Angela Merkel and French President Francois Hollande over easing back on austerity programs in favor of economic growth. These questions keep markets on edge and drive investors away from what they see as riskier assets.

"Our concern remains that little will be delivered in terms of additional risk-sharing measures, leaving markets, and as such the economies, vulnerable to renewed stress," said Marcussen of Societe General.

(Writing by Jeremy Gaunt; Editing by David Stamp)

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Comments (7)
GMavros wrote:
There is nothing to celebrate about in the new Greek election results.
The anti-bailout party more than doubled its strength from last month’s elections which means the pro-bailout party will never gain enough support to implement the Troica suicidal austerity demands.
Either the austerity plan will need a major overhaul or Greece will exit the Euro as early as January 2013, if not earlier.
I do not believe the south European workers are as apathetic or incompetent as their northern & US counterparts. They know who is behind all this mess and they will do something about it.

Jun 18, 2012 8:32am EDT  --  Report as abuse
epirat wrote:
true.. the current policies only got 6 months tops in Greece. If nothing changes to the better during this in Europe, its game over

Jun 18, 2012 12:55pm EDT  --  Report as abuse
NukerDoggie wrote:
Merkel says today that Gernamy won’t budge on the strict Greek bailout terms. And it’s much bigger than Greece, with Spain and Italy on the precipice too.

Germany, the EU financial/economic powerhouse, is thus staring into a gigantic toilet where money is flushed into oblivion. They’re politically unable to grant looser terms – that would have to be copied in Spain, Italy, Ireland and everywhere else. Germany would get little for its cash in such a scenario. And Germany craves CONTROL, DOMINANCE.

It isn’t going to get it, and it isn’t going to flush its wealth down the euro-toilet. Germany is mostly content to let the feces hit the fan on the impending euro breakup. Plenty of ‘stink’ is going to hit and stick to Germany too, but so be it. She’s still got Russia and China and lots of other emerging economies to ally with.

Jun 18, 2012 1:45pm EDT  --  Report as abuse
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