July 12, 2011 in Business

Eurozone to alter bailout fund

Finance ministers plan more flexibility to keep debt crisis at bay
Gabriele Steinhauser Associated Press
 
Italy under scrutiny

• Italy came under market pressure after remarks last week by Premier Silvio Berlusconi criticizing his Finance Minister Giulio Tremonti. Berlusconi’s sniping cast doubt on the government’s political will to carry through with Tremonti’s proposals to find (euro) 48 billion in new savings over three years and eliminate the deficit by 2014.

• Italy has a heavy debt load of some 120 percent of gross domestic product, but so far has been able to carry that load by selling new bonds at affordable interest rates.

BRUSSELS – Eurozone finance ministers say they are ready to make their existing bailout fund more flexible in an effort to better support struggling governments and stop the currency union’s debt crisis from spreading to larger economies like Italy and Spain.

Jean-Claude Juncker, who chaired Monday’s meeting of eurozone finance ministers, said late Monday that the ministers would also look at giving bailed-out countries more time to repay bailout loans and lowering their interest rates.

The ministers did not give details on how the region’s bailout fund could be made more flexible. But possible tools could include giving the fund the power to buy up distressed debt on the open market to stabilize prices.

Banks that have been involved in talks over contributions to a second bailout for Greece have also been pushing for eurozone-funded bond buybacks, which could cut the country’s overall debt load and take shaky government bonds off their balance sheets.

Juncker, who is prime minister of Luxembourg and chairs the eurozone finance ministers group, vowed that the details would be filled in “shortly, and shortly means as soon as possible.”

It won’t be too soon for financial markets, which sold off European stocks and the bonds of Spain and Italy on Monday amid fears that those two countries would be drawn into the debt turmoil that has led to bailouts for much smaller Greece, Portugal and Ireland. The fear is that while Europe’s (euro) 750 billion bailout fund can support those three – only 6 percent of the eurozone economy – Spain and Italy are too big to be bailed out.

Italy’s FTSE MIB stock index closed off 4 percent, and the euro sagged by more than a percent to $1.4044, for a time dipping below $1.40.

The yield, or interest rate, on Italian and Spanish government bonds shot up Monday. The rate on Italian 10-year bonds jumped to 5.7 percent from 5.3 percent at the beginning of trading, following sharp rises on Thursday and Friday.

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