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Eyes on Italy and Greece in eurozone debt woes
Source: Agencies |
September 7, 2011, Wednesday
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Print Edition
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THE eurozone's debt crisis appeared at risk of spiraling out of control yesterday amid doubts about Italy and Greece's willingness to push through austerity demanded by their partners, and hardening opposition to further aid in paymaster Germany.
Against a backdrop of nationwide strikes, the government of embattled Italian Prime Minister Silvio Berlusconi scrambled to secure parliamentary backing for a package of reforms that has hammered Rome's credibility in financial markets because of the chaotic way it has been handled.
Meanwhile fiscal backsliding in Greece has put a new aid payment from the country's international lenders at risk and prompted some lawmakers in German Chancellor Angela Merkel's party to press her on why Athens is not simply booted out of the 17-nation currency bloc.
Just six weeks after eurozone leaders came together in Brussels to agree new anti-crisis measures, their strategy looks to be unraveling, with resistance to austerity in Europe's southern periphery rising just as resentment in core countries like Germany builds to a crescendo.
"Once you say to Italy we will not allow you to fail, they then have the upper hand," said David Mackie, an economist at JP Morgan in London. "There has been a moral hazard issue with Greece for some time. Now we have one in Italy too."
The euro tumbled to a six-month low against the yen and a seven-week low against the dollar in early trade yesterday as market concerns about the crisis grew.
Italian bonds edged higher yesterday after a sharp sell-off, with traders citing intervention by the European Central Bank.
On Monday, incoming ECB President Mario Draghi said the bank could not be counted on to buy up the bonds of weak eurozone members indefinitely, in what was widely interpreted as a warning to his native Italy.
The ECB agreed last month to buy up Italian and Spanish debt on the open market to prevent an upward spiral in their borrowing costs that threatened to tear Europe's 12-year old single currency apart.
But it did so only after receiving new reform pledges from Rome that Berlusconi's government, under pressure from unions, has since tinkered with.
The ECB is also counting on European governments to step in and assume the role of bond-buyer of last resort once their rescue mechanism, the European Financial Stability Facility (EFSF), receives new powers.
For that to happen, national parliaments need to approve the changes to the mechanism - a significant hurdle in member states where aid to eurozone stragglers is increasingly unpopular.
Slovakia is refusing to hold a vote until all other eurozone members have backed the changes. In Germany, Merkel's own position is at risk if enough of her conservative allies rebel in a Bundestag vote scheduled for September 29.
In preliminary internal party votes late on Monday, 25 lawmakers from Germany's ruling coalition refused to back more powers for the EFSF, raising questions about whether Merkel can deliver a parliamentary majority without help from the opposition.
If she fails to accomplish that, she would come under pressure to dissolve parliament and call early elections, a step that still seems unlikely for now.
At a meeting with her party on Monday, Merkel was pressed repeatedly on whether it wouldn't be preferable to push Greece out of the eurozone. She warned against it, saying such a step might set off a dangerous "domino-effect."
Against a backdrop of nationwide strikes, the government of embattled Italian Prime Minister Silvio Berlusconi scrambled to secure parliamentary backing for a package of reforms that has hammered Rome's credibility in financial markets because of the chaotic way it has been handled.
Meanwhile fiscal backsliding in Greece has put a new aid payment from the country's international lenders at risk and prompted some lawmakers in German Chancellor Angela Merkel's party to press her on why Athens is not simply booted out of the 17-nation currency bloc.
Just six weeks after eurozone leaders came together in Brussels to agree new anti-crisis measures, their strategy looks to be unraveling, with resistance to austerity in Europe's southern periphery rising just as resentment in core countries like Germany builds to a crescendo.
"Once you say to Italy we will not allow you to fail, they then have the upper hand," said David Mackie, an economist at JP Morgan in London. "There has been a moral hazard issue with Greece for some time. Now we have one in Italy too."
The euro tumbled to a six-month low against the yen and a seven-week low against the dollar in early trade yesterday as market concerns about the crisis grew.
Italian bonds edged higher yesterday after a sharp sell-off, with traders citing intervention by the European Central Bank.
On Monday, incoming ECB President Mario Draghi said the bank could not be counted on to buy up the bonds of weak eurozone members indefinitely, in what was widely interpreted as a warning to his native Italy.
The ECB agreed last month to buy up Italian and Spanish debt on the open market to prevent an upward spiral in their borrowing costs that threatened to tear Europe's 12-year old single currency apart.
But it did so only after receiving new reform pledges from Rome that Berlusconi's government, under pressure from unions, has since tinkered with.
The ECB is also counting on European governments to step in and assume the role of bond-buyer of last resort once their rescue mechanism, the European Financial Stability Facility (EFSF), receives new powers.
For that to happen, national parliaments need to approve the changes to the mechanism - a significant hurdle in member states where aid to eurozone stragglers is increasingly unpopular.
Slovakia is refusing to hold a vote until all other eurozone members have backed the changes. In Germany, Merkel's own position is at risk if enough of her conservative allies rebel in a Bundestag vote scheduled for September 29.
In preliminary internal party votes late on Monday, 25 lawmakers from Germany's ruling coalition refused to back more powers for the EFSF, raising questions about whether Merkel can deliver a parliamentary majority without help from the opposition.
If she fails to accomplish that, she would come under pressure to dissolve parliament and call early elections, a step that still seems unlikely for now.
At a meeting with her party on Monday, Merkel was pressed repeatedly on whether it wouldn't be preferable to push Greece out of the eurozone. She warned against it, saying such a step might set off a dangerous "domino-effect."
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