Daily Mail
By Daily Mail Reporter

Euro crisis is spreading, says EU chief Barroso, as Britain could be forced to pay more to stave off collapse

The eurozone must make further changes to its bailout fund to ensure the debt crisis does not spread to Italy and Spain, a top EU official said today.

European Commission President Jose Manuel Barroso made the claim just two weeks after eurozone leaders reached an ‘historic’ deal on the currency union’s crisis strategy – including a second bailout for Greece.

The accord, which also included far-reaching new powers for the rescue fund, has failed to stem panic on financial markets over the ability of Italy and Spain – third and fourth largest economies in the eurozone – to repay their debts.

Although yields, or interest rates, on Italian and Spanish bonds were below records reached earlier this week, the two countries’ stock markets were once again firmly in the red and the euro lost 0.9 per cent against the dollar.

The main reason for that sell-off was ‘the undisciplined communication and the complexity and incompleteness of the 21st July package,’ Mr Barroso said in a letter to eurozone leaders yesterday.

That has led to ‘a growing scepticism among investors about the systematic capacity of the euro area to respond to the evolving crisis,’ he wrote.

Mr Barroso urged a ‘rapid reassessment of all elements related to the eurozone’s bailout fund’ – known as the the European Financial Stability Facility – so it could ‘effectively use its new powers’.

A spokesman for Mr Barroso confirmed that those elements included the fund’s size.

On July 21, eurozone leaders decided to equip the EFSF with new pre-emptive powers, including the ability to buy up distressed government bonds to support their prices or extending short-term credit lines to countries before they hit a crisis.

That was a recognition that rescue packages like the ones given to Greece, Ireland and Portugal, which keep those countries out of the market for several years, would be far too expensive for Italy and Spain.

But analysts have said the EFSF will not be able to properly use these new powers at its current size.

Of the 440billion euros in the fund, 43.7 billion has been committed to the bailouts in Ireland and Portugal.

The EFSF will see its reserves diminished significantly by a new 109 billion euro rescue package for Greece, of which the International Monetary Fund may contribute less than a third, and by having to take over the 32.9 billion euro in bilateral loans left to pay from Greece’s first bailout.

That would leave the fund with less than 300 billion euro – not enough to successfully help Italy and Spain, analysts have warned.

A large-scale intervention in secondary bond markets could easily suck up much of that, considering that the European Central Bank spent almost 80 billion euros on cushioning drops in Irish, Portuguese and Greek bonds before those much smaller countries had to be bailed out.

Mr Barroso also urged leaders to speed up the implementation of the previously agreed changes to the fund, which have to be ratified by national governments and in many cases parliaments, which are currently on summer breaks.

At the moment, experts from eurozone countries as well as the ECB and the commission are still poring over the decisions taken by the leaders, and Mr Barroso’s letter indicated that some states may already be pulling back from their commitments.

‘These changes should also avoid introducing excessive constraints in terms of either additional conditionality or collateralisation of EFSF lending,’ Mr Barroso wrote.

The July 21 deal was vague on the conditions under which the EFSF would be allowed to intervene in the bond markets, saying only it would come with ECB analysis and the approval of all eurozone countries.

The most recent anxiety over Italy and Spain comes after banks and other private investors on Greek bonds were asked to take some losses as part of the country’s second bailout – a move that the eurozone had ruled out for most of the crisis and which analysts warn may well be in the cards for other weak European states.

It also coincides with a broader fear that the U.S. economy, in particular, may be weakening, dealing a further blow to Europe’s recovery.

That fear has gripped stock markets for the past couple of weeks and Thursday was proving no exception – Milan’s main index plunged a further 2.1 per cent while shares on Spain’s Ibex were down 0.2 per cent.

Full article


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