European Commission president Jose Manuel 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.
“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,” Mr Barroso said.
He urged member states to speed up parliamentary approval of crisis-fighting measures agreed at a July 21 summit meant to stop contagion from Greece, Ireland and Portugal, which have received EU/IMF bailouts, to larger European economies.
But neither he nor 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.
Italy has borne the brunt of a sell-off triggered by the unresolved debt crisis and fears of a global economic slowdown. Its stocks and bonds gained some respite after a further early slump yesterday.
Italy’s economy minister Giulio Tremonti yesterday held two hours of emergency talks with the chairman of eurozone finance ministers, Jean-Claude Juncker, in Luxembourg but neither disclosed anything of substance after the meeting.
The commission said after Mr Rehn spoke to Mr Tremonti that Italy was “doing what is necessary to put the country back on track for higher sustainable growth and ensuring fiscal consolidation”.
A commission spokeswoman said there had been no discussion of a bailout for Italy, which would overwhelm the bloc’s existing rescue funds.
The market turmoil caused alarm in some parts of Europe but apparent insouciance in the bloc’s biggest economy.
“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.”
German economics minister Philipp Roesler said Italy and Spain were not even discussed at Berlin’s weekly cabinet meeting yesterday which he chaired in place of Chancellor Angela Merkel, who is on vacation and did not call in.
The eurozone’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.
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.
Italy and Spain could offer new austerity measures to try to placate the markets, but Rome has just adopted a €48 billion savings package and Madrid’s lame duck government has just called an early general election for November 20.
Shares in banks exposed to eurozone sovereigns, particularly in Italy, have taken a hammering and are having growing difficulty in securing commercial funding.
“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. “The risk of a credit crunch in southern Europe is growing.”