Brussels ‘deeply concerned’ over trend in eurozone
Cost of borrowing for Italy, Spain has hit record levels
Two weeks after an extraordinary eurozone summit tried to reassure the financial markets on the strength of the European currency, pressure continues to mount on Italy and Spain – key euro area economies – and on Brussels to give further signals that no more bailouts are needed.
Breaking from the traditional August summer recess in Brussels, the European Commission president Josè Manuel Barroso yesterday sent a letter to the heads of government of the euro area warning them of the growing risks to the stability of the currency and urging rapid action to contain the potential crisis.
“Developments in the sovereign bond markets of Italy, Spain and other euro area member states are a cause of deep concern,” Mr Barroso wrote.
“Though these developments are clearly unwarranted on the basis of economic and budgetary fundamentals and the recent efforts of these member states, they reflect a growing scepticism among investors about the systemic capacity of the euro area to respond to the evolving crisis. Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis,” he said.
The leaders of the 17-member euro area agreed last month to boost the European Financial Stability Fund – a €440 billion temporary bailout facility aimed at helping ailing eurozone economies manage their debts – and on a second bailout for Greece worth €109 billion. However, these bold steps had little effect so far as the cost of borrowing for Italy and Spain this week hit record levels.
Admitting that the decisions taken so far “are not having their intended effect on the markets”, Mr Barroso said the negative market sentiment was due to the “global economic uncertainties” and to the “undisciplined communication and the complexity and incompleteness of the July 21 package”.
When the package was announced, a wide range of figures were quoted by different leaders for the overall value of the deal. This sowed uncertainty in the markets that the agreement was not unanimous and might not be implemented.
Mr Barroso said the eurozone crisis was no longer “just in the euro area periphery” – with reference to Ireland, Portugal and Greece – and urged member states to pull up their socks and do what was necessary to solve the issue without further delays.
“I would like to call on you to accelerate the approval procedures for the implementation of these decisions to make the EFSF enhancements operational very soon. These changes should also avoid introducing excessive constraints in terms of either additional conditionality or collateralisation of EFSF lending. I trust that governments and national parliaments will rapidly approve these decisions necessary to improve the EFSF flexibility.”
Judging by the way things were developing, he said member states might need to pump more money and guarantees into the EU bailout tools to deal with the needs of larger economies that might soon be in trouble.
Although Malta is not affected by the turmoil and its economy is performing at better levels than the euro area, as a member of the eurozone it is also contributing towards the EU’s rescue tools.
Under the €440 billion EFSF temporary-fund deal, Malta is making available about €400 million in guarantees, increasing by a further €50 million in mid-2013 when the permanent €500 billion European Stability Mechanism kicks in. Malta has so far also lent about €80 million to Greece on a bilateral basis, although this money will be fully paid back with interest.