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Fears euro system will collapse in debt

Aug. 4, 2011 at 3:00 AM   |   Comments

ROME, Aug. 4 (UPI) -- Fears mounted Thursday the system sustaining Europe's debt crisis would collapse amid alarm Italy and Spain were sliding into debt that couldn't be bailed out.

Italy and Spain -- the eurozone's third- and fourth-largest economies and the world's seventh- and 10th-largest -- opened the bond markets Thursday with borrowing rates near the 7 percent threshold that triggered bailout talks with Greece, Ireland and Portugal.

French and Belgian bonds opened after seeing volatile trading Wednesday.

European Commission President Jose Manuel Barroso released a statement late in the day saying, "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."

The euro area, or eurozone, includes the 17 European Union countries that use the euro as their common currency and sole legal tender.

Barroso called Italy and Spain's near-unprecedentedly high interest rates and weakening bond prices "a cause of deep concern." European banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls. Barroso urged governments to signal "resolve to address the sovereign debt crisis with the means commensurate with the gravity of the situation."

Embattled Italian Prime Minister Silvio Berlusconi delivered an emergency address to Parliament late Wednesday, defiantly warning speculators they were wrong to bet against Italy.

He rejected renewed calls for his resignation and vowed Italy would make no more budget cuts or new austerity plans, calling economic growth the country's best defense.

"We have sound economic fundamentals," he said.

Italy's $2.2 trillion debt burden is more than that of the United States, compared with the size of its economic output, but its annual budget deficit is 4 percent, The Washington Post reported.

Before Berlusconi spoke, Italian Finance Minister Giulio Tremonti, with whom Berlusconi has engaged in public battle, huddled with Jean-Claude Juncker, president of the Euro Group of eurozone finance ministers, in Luxembourg to discuss Italy's intensifying debt crisis.

Spanish Prime Minister Jose Luis Rodriguez Zapatero rushed back to Madrid Wednesday within hours of beginning his August vacation -- after postponing it Tuesday -- for emergency meetings with Spanish and European leaders about Spain's increasingly desperate situation.

Spain was to sell as much as $5 billion in short-term sovereign bonds Thursday, and the European Central Bank was to meet in Frankfurt to discuss the crisis.

Switzerland's central bank stunned markets Wednesday with a surprise attempt to devalue its popular safe-haven franc because it said it was "massively overvalued."

The Swiss National Bank cut target interest rates to "as close to zero as possible" and said it would inject $65 billion into the Swiss money supply in an attempt to halt the franc's relentless appreciation against both the U.S. dollar and euro.

Switzerland is not a member of the European Union.

Gold hit another record high of $1,663.40 a troy ounce.

A full-blown Italian and Spanish debt crisis would hit large European banks hardest, the Post said, but could also dry up interbank lending worldwide.

U.S. banks and investment funds are also more exposed to Italy and Spain than they are to Greece. Direct and indirect U.S. holdings in Italian and Spanish debt amounts to about $450 billion, the Post said.

© 2011 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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