A renewed sense of nervousness emerged across European markets Tuesday as the European Commission admitted that it has been asked to advise on contingency plans to deal with a possible Greek exit from the euro.
Brussels' confirmation that it had examined the legal
ramifications of Athens bowing out of the eurozone came against the
backdrop of a sharp rise in borrowing costs for both Spain and Italy.
Commission spokesman Olivier Bailly said Brussels has "for several
weeks" been dealing with enquiries about the legal ramifications of
"speculative scenarios on the exit of a country from the eurozone."
A Greek exit would likely require capital and border controls, to
stop people taking euros out before they are converted into weaker
drachmas. Bailly said such controls are not possible for economic
reasons, but only on "very specific public order and security
grounds."
Also adding to the current sense of investor concern is the threat
posed to German parliamentary backing for Europe's fiscal pact on
budget discipline as a result of the increasingly rancorous
negotiations between the government and the opposition.
Tuesday's rises in the yields on Spanish and Italian benchmark
10-year bonds came amid worries that Madrid's bank bailout will fall
short of what is needed to shore up the eurozone and investor
uncertainty ahead of national elections in Greece on the weekend.
While borrowing costs in Spain climbed to their highest level in
about 8 months, Italy's yield curve spiked up to 6.16 percent, the
highest since January.
After edging down close to key 6 percent mark on Monday in the
wake of Spain's bank bailout, the yield on the nation's benchmark
10-year-bond climbed to 6.67 per cent to reach its highest level
since November.
Economists believe that government borrowings costs above 6 percent are not sustainable over the longer term.
Data released on Monday showed Italy's economy contracted by 0.8
percent during the first quarter of the year.
Austrian Finance Minister Maria Fekter also helped to fuel market
tensions when she backtracked Tuesday from comments implying that
Italy might also need international help.
"There is a possibility that support may also be provided there,"
she told TV broadcaster ORF, pointing to Rome's high borrowing costs
and warning that the euro bailout fund was not big enough to rescue
Italy.
Her comments sparked an angry reaction from Rome prompting Fekter
to tell reporters Tuesday that there were "no indications" that Italy
would apply for EU-backed aid.
The international rating agency Fitch also insisted Tuesday that
Italy was in a better state than Spain would not be needing a
bailout.
"Italy is much closer to a sustainable macro-economic position,"
said Fitch country analyst Ed Parker.
At the same time, E.U. Economy Commissioner Olli Rehn warned that
nations pushing eurobonds as answer to the eurozone debt crisis would
have to face up a tougher fiscal regime combined with a bigger role
for Brussels.
"More fiscal integration requires more pooling of fiscal
sovereignty and that calls for a very profound debate," he said.
Still, analysts say investors are concerned that the up to
100-billion-euro in bank aid sought by Spain will not be enough to
allay fears about the euro and that Europe will now have to pump
money into the Spanish state.
But while shares in Madrid managed to rise by a cautious 0.41 percent in early afternoon trading, stocks in Italy slipped by 0.50 percent.
