Europe turned up the heat on Italy and Greece to fix their finances on Monday, as finance ministers scrambled to conjure up a firewall big enough to stop the debt crisis from infecting more countries.
As euro ministers gathered at EU headquarters to address the festering crisis, France moved to protect its gold-plated credit rating from the contagion dragging down Rome by announcing big pre-election spending cuts and tax hikes.
But while Rome and Athens were told to commit to reduce debts in order to ease currency partners’ growing concerns, the ministers themselves came under mounting pressure to find a way to deliver a rescue fund boost decided by EU leaders.
As worried non-euro ministers were to gather simultaneously in a Brussels hotel, the EU piled pressure on Italy to make good on its vows to slash its 1.9-trillion-euro ($2.6 trillion) debt pile – with borrowing costs for Rome hitting the sort of levels that triggered bailouts for Greece, Ireland and Portugal.
European Union Economic Affairs Commissioner Olli Rehn said it was “essential” that Italy sticks to stated fiscal targets, ensures their implementation and intensifies structural reforms designed to deliver growth.
Rehn said officials from the Commission would be in Rome this week working alongside International Monetary Fund auditors invited in by Italy during last week’s G20 summit.
He used a football analogy to try and connect with the Italian public when he said that “it’s important that in fiscal policy Italy plays catenaccio,” a cynical defensive style intended to give nothing away to the opposition.
German Finance Minister Wolfgang Schaeuble, whose government pays the lion’s share of eurozone bailout costs, insisted Italy was no Greece, even as the yield on Italian 10-year debt bonds rose to a record 6.596 percent in morning trading.
“The data on the real economy in Italy do not justify this nervousness,” Schaeuble said.
Italian share prices rallied on rumors that Prime Minister Silvio Berlusconi would resign, but global markets turned lower.
The eurozone debt crisis has been in a deepening spiral since August, when Italy first came under intense pressure on bond markets and the IMF blocked the release of eight billion euros ($11 billion) for Greece from a first bailout last year as it wasn’t meeting targets.
Once again, with a new Greek coalition government being formed after Prime Minister George Papandreou agreed to step aside, ministers are seeking assurances on Greek promises before unblocking the loans.
Greece’s political leaders were continuing talks late on Monday to appoint a prime minister who would head the country's new coalition government, a government spokesman said.
Earlier an official requesting anonymity told Reuters a deal had yet to be reached but said talks were going on in a "constructive spirit".
Greek political leaders had been expected to agree on Monday on who would to lead the new crisis coalition to push through parliamentary approval of a euro zone bailout deal.
The European Commission demanded “clarity” from Athens, while eurozone chief Jean-Claude Juncker said a decision would depend on how ministers view commitments given by Greek Finance Minister Evangelos Venizelos.
“We will discuss of course the sixth disbursement but it depends on the answers we will be given by the Greek government in order to know if yes or no we will release the sixth disbursement today,” Luxembourg Prime Minister Juncker said ahead of one-on-one talks with Venizelos.
Venizelos said that a deal to form a national unity government in Greece was itself sufficient.
“We have a new government of national unity and of national responsibility,” he said. “This is the proof of our commitment and of our national capacity to implement the programme and to reconstruct our country.”
Greece needs the money from last year’s 110-billion-euro bailout by mid-December to stay afloat.
The initial target for coming up with details on how to beef up the European Financial Stability Facility (EFSF) was a planned meeting of EU finance ministers on November 30.
However, with Spain also under pressure, EU diplomats said a fresh meeting of eurozone finance ministers may need to be held on November 17.
Officials are working on “leveraging” up the EFSF’s capacity, but a diplomatic source said the one-trillion-euro target was proving difficult to reach, after failing to win support from international partners at G20 talks last week -- and in any case was insufficient given the worries over Italy.
The EFSF had to pay a considerably higher effective interest rate of 3.59 percent to raise funds from investors on Monday, with demand barely exceeding the 3.0 billion on offer.
Papandreou is making way for a national unity government which will then have to ratify a crucial 230-billion-euro debt rescue package, agreed by Greece’s euro partners but in limbo due to political drama in Athens.
The new eurozone rescue includes 100 billion euros in new loans for the Athens government and a debt reduction scheme with banks, which agreed to lose 50 percent of their bond holdings to cut Greece’s debt by 100 billion euros.