MILAN/MADRID (Reuters) - Spain called on Monday for the European Central Bank to step in to fight financial market pressure after any hopes that the Greek election result might ease the strain on vulnerable Spanish and Italian debt were dashed.
The cost of borrowing rose for both Spain and Italy, the two big euro zone economies under fire for poor finances, widening the gap between what they have to pay and what Germany pays.
The yield on Spain’s 10-year bond went above the 7 percent widely viewed as unsustainable. Italy’s was just above 6 percent.
“The financial markets ... aren’t relaxing their pressure on Spain. Doubts continue regarding the construction of Europe, about the present and the future of the euro,” Treasury Minister Cristobal Montoro told the Spanish Senate during a budget hearing.
“The ECB must respond firmly, with reliability, to these market pressures that are still trying to derail the joint euro project.”
Within a few hours of the election result - a narrow win for Greek parties committed to the terms of a European Union/International Monetary Fund bailout - financial markets reacted as if nothing had changed.
The response underlined the essential problem facing the euro zone; short-term improvements to the climate do not address the root problem 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 pledged to reneging on its commitments and possibly forcing Greece out of the euro zone was averted, so leaders of Italy and Spain welcomed the narrow victory for Greek mainstream parties.
“This allows us to have a more serene vision for the future of the European Union and for the euro zone,” Italian Prime Minster Mario Monti told reporters in Mexico upon arriving for a G-20 summit.
Also speaking before the same meeting, Spanish Prime Minister Mariano Rajoy greeted the election outcome as “good news for Greece, very good news for the European Union, for the euro and also for Spain”.
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 programme that held down yields of government debt in recent months. The ECB is reluctant to fire up the programme again.
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.
The share and currency markets were also underwhelmed by the Greek results. After an initial spike, Europe’s top shares and the euro were flat within a couple of hours of opening on Monday.
Sceptics 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 needing between 60 billion and 70 billion euros (47.90- 56.2 billion pounds) 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 programmes in favour of growth. These questions are the kind that 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.
Written by Jeremy Gaunt; Editing by Peter Graff