Talk of ‘Italy next for bailout’ draws angry rebuke

Raising the stakes in Europe’s debt crisis, Austria’s finance minister said Italy may need a financial rescue due to its high borrowing costs, drawing a furious rebuke from the Italian prime minister.

Maria Fekter’s assessment of the eurozone’s third-largest economy stoked investors’ fears that Europe is far from ending two years of turmoil — a feeling reinforced by Dutch Finance Minister Jan Kees de Jager, who said the eurozone was “still far from stable”.

A deal by eurozone finance ministers on Saturday to lend Spain up to €100bn to recapitalise its banks was seen by many in the markets as yet another sticking plaster. Spanish 10-year bond government yields soared to 6.81%, their highest level since the euro’s launch in 1999.

“It may be that, given the high rates Italy pays to refinance on markets, they too will need support,” Fekter said.

Italian Prime Minister Mario Monti called her comments “completely inappropriate” for an EU finance minister. Eurozone officials said they were deeply unhelpful.

The market reaction suggests that ministers have failed to break the so-called doom loop between rising government debt, economic recession and teetering banks that previously drove Greece, Ireland and Portugal into EU/IMF bailouts.

Credit ratings agency Fitch said the bank rescue may help stabilise Spain’s sovereign rating, which it cut last week by three notches to BBB, and the bailout should not have a direct impact on other eurozone countries.

Even though Italy’s deficit and unemployment are lower than Spain’s and its banks are not exposed to a real estate crisis, doubts about Rome’s ability to turn itself around during a deep recession are keeping international investors at bay.

Italy’s debt is now 120% of GDP — second only to Greece’s debt mountain.

European Commission President José Manuel Barroso, ECB policymaker Christian Noyer and French Finance Minister Pierre Moscovici all called yesterday for swift moves to create a eurozone banking union.

Barroso said a cross-border banking supervisor, a deposit guarantee scheme and a bank resolution fund could be put in place in 2013 without changing EU treaties.

Germany has rejected a deposit guarantee or a resolution fund, saying they require treaty change.

The Bundesbank said a European banking union could bring advantages only if properly anchored in a fiscal union with powers to stop countries breaking budgetary rules.

Fekter’s typically outspoken comments came after Italy’s industry minister dismissed the idea that Rome may need external help, saying reforms adopted by his government so far put the Italian economy on a sound footing.

Her concerns are shared by one of the German government’s council of economic advisers, Lars Feld: “The chances are not so small that Italy may also come under fire, in particular as the promised labour market reform has turned out to be less ambitious.”

Reuters