December 12, 2013
Spanish, French borrowing costs climb, contagion builds
Madrid was forced to pay the highest borrowing costs since 1997 at a sale of 10-year bonds, with yields a steepling 1.5 points above the average paid at similar tenders this year. The euro fell on the foreign exchanges in response.
Prime Minister Mario Monti outlines austerity measures aimed at restoring confidence in Italy's strained public finances later, when he goes before the Senate to seek a vote of confidence in his new government.
France and Germany have stepped up their war of words over whether the ECB should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases have failed to calm markets.
Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France has urged stronger ECB action but Berlin continues to resist, saying European Union rules prohibit such action.
"If politicians think the ECB can solve the euro crisis, then they are mistaken," German Chancellor Angela Merkel said, adding that even if the ECB assumed a role as a lender of last resort, it would not solve the crisis.
Investors and euro zone officials hope that if Merkel and others find themselves staring into the abyss, the unthinkable will rapidly become thinkable.
ECB policymakers continue to reject international calls to intervene decisively, stressing that it is up to governments to resolve the debt crisis through austerity measures and reforms.
With turmoil reaching a crescendo, euro zone banks are finding it harder to obtain funding. While the stresses are not yet at the levels of the 2008 financial crisis, they have continued to mount despite ECB moves to provide unlimited liquidity to banks.
Fitch Ratings warned it might lower its "stable" rating outlook for U.S. banks because of contagion from problems in troubled European markets.
And fellow ratings agency Moody's cut ratings of 12 German public-sector banks, believing they are likely to receive less federal government support if needed.
German Finance Minister Wolfgang Schaeuble said today that the euro zone's debt crisis was beginning to hit the real economy and urged vigilance to prevent contagion from infecting banks and insurance firms.
The International Monetary Fund replaced its European Director in a sign the global lender is setting a more forceful course of action in dealing with the European crisis.
The Fund named Reza Moghadam, currently director of the fund's strategy, policy and review department, as its new director for Europe, replacing Antonio Borges who last month suggested the IMF could buy Spanish or Italian bonds alongside the euro zone's bailout fund but was forced to backtrack.
Monti starts his first full day as Italian prime minister comforted by an opinion poll that said an overwhelming majority of Italians supported him.
Greece's new technocrat Prime Minister Lucas Papademos faces mass street protests on today, the day after winning a confidence vote for a national crisis coalition that is already split on the need for further austerity measures.
The size and mood of the rally, an annual march marking the end of military rule in 1973, will signal just how bitterly a restive public will fight further tax rises and spending cuts that international lenders demand in return for a massive bailout.
Greece's main conservative leader Antonis Samaras has refused to bow to EU demands for a written commitment to the bailout programme and called for elections in three months to restore social peace.