Italy now the biggest threat to eurozone

ITALY overtook Greece as the prime threat to the stability of the eurozone on Monday as governments sought to placate frantic bond markets and halt accelerating financial contagion.

Italian government bond yields rose to their highest since 1997 — approaching levels regarded as unsustainable — as political turmoil in Rome threatened to drag the eurozone’s third largest economy deeper into the region’s debt crisis.

Greece’s outgoing socialist prime minister and conservative opposition leader rushed to put in place an interim national unity government for just long enough to save the country from imminent default by implementing a new bailout programme.

France announced a new wave of austerity measures designed to preserve its wobbly AAA credit rating, without which the eurozone might no longer be able to bail out its weakest members.

In Brussels, eurozone finance ministers agreed a detailed mandate to scale up the currency zone’s rescue fund by the end of November to shield vulnerable but solvent economies such as Italy’s and Spain’s from a possible Greek default.

In Italy, prime minister Silvio Berlusconi defied huge pressure to resign as he struggled to hold a crumbling centre-right coalition together after being forced to accept intrusive IMF surveillance of his economic reforms.

Political sources said leaders of Berlusconi’s PDL party had urged him to resign late on Sunday but he was resisting.

Stocks fell worldwide on the uncertainty, but Italian shares ended higher, partly on hopes that Berlusconi could soon be gone, traders said.

A cabinet minister said Italy would face early elections if party rebels stripped Berlusconi of his majority in a crunch vote on public finances in parliament today.

“If we have the majority we’ll carry on, otherwise there’ll be elections,” Gianfranco Rotondi, a minister without portfolio, said after meeting Berlusconi at his Milan home.

In Paris, president Nicolas Sarkozy’s centre-right government announced a new wave of austerity measures, bringing forward a rise in the retirement age, raising some taxes and de-coupling welfare benefits from inflation, in a drive to cling on to France’s top-notch credit rating.

The package designed to save €18.6 billion in 2012 and 2013 inflicted further pain on voters six months before Sarkozy is expected to seek re-election against a resurgent Socialist opposition, whose candidate, Francois Hollande, is far ahead of him in opinion polls.

Prime minister Francois Fillon said French public finances had been in the red for 30 years and the time had come to break with the damaging habit of spending beyond its means.

“We’ve got to pull out of this dangerous spiral,” he told a news conference.

As finance ministers of the 17-nation currency area conferred on Greece and ways of strengthening their financial firewall, one eurozone official said: “We exhausted our scope for concern with Greece. The main concern of the ministers now is Italy and the leveraging of the EFSF.”

Eurozone leaders agreed last month to scale up the European Financial Stability Facility’s firepower to around €1 trillion by offering first loss guarantees on new bond issues, and attracting foreign investors through a special purpose vehicle with credit enhancements.

Europe’s top economic official, Olli Rehn, said that while the European Commission had to be ready for all eventualities, there was no study being conducted of how a country could leave the eurozone, which is not foreseen in the EU treaty.

Until the new firefighting tools are ready, the task of trying to prevent a bond market meltdown that could leave bigger eurozone economies needing rescuing falls to the European Central Bank.

The ECB disclosed on Monday that it had stepped up purchases of eurozone government bonds, presumed to be mostly Italian, buying €9bn last week in the first few days in office of new ECB President, Mario Draghi.

But the bond-buying has failed to stop Italian spreads over safe-haven German Bonds hitting a euro lifetime high due to the deepening political instability.

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