Eurozone fears spread to Italy

File Photo / Martin Sykes

The Republic of Ireland's €85 billion ($149 billion) bailout has failed to end the crisis of confidence gripping the eurozone, and may even have exacerbated it.

Far from being immunised against the "contagion", other economies are now coming under renewed attack.

Most worryingly, since the Irish deal investors have started to dump Italian government debt even as the sell-off of Greek, Irish, Spanish, Belgian and Portuguese securities continues - a broad vote of no confidence from the markets to European Union leaders.

Talk of discounts for bond-holders, for debt issued after 2013, and the sheer unaffordability of some of the rescue deals implemented and in imminent prospect have spooked many.

The European Central Bank's president, Jean-Claude Trichet, tried to reassure markets by saying current bond-holders were secure, in line with precedents set by the International Monetary Fund (IMF) in dealing with other sovereign defaults.

"In stating very explicitly that Europe will be 'fully consistent with IMF policy' and 'IMF practices' as regards private sector involvement, the position made public by governments last Sunday is a useful clarification," Trichet told the European Parliament.

During trading yesterday, the euro fell by a substantial 1 per cent to sink below the €1.30 level against the dollar.

The single currency has depreciated by 6.5 per cent in a little more than a week - a dramatic decline. The cost of insuring Spanish, Italian, Irish and Portuguese government bonds against default rose to fresh highs, with the "risk premium" demanded by investors to hold Italian rather than equivalent German government bonds hitting 200 basis points, the highest since 1997, before the euro.

The yield on 10-year Spanish bonds climbed nine basis points to 5.55 per cent, after a 25 basis-point jump on Tuesday. Many economists fear a yield of 6.5 per cent could push the country into an unsustainable financing cycle.

Markets were also beginning to price in a second Greek crisis, after news that the payback by Athens of the €110 billion in loans granted in May would be extended from 2015 to 2024. Fears of a Portuguese bailout grow and Belgium is also at risk.

But it is Spain, and increasingly Italy, causing anxiety. Most observers argue that Spain would probably bring the EU/IMF €770 billion rescue fund to breaking-point. Italy, the third largest economy in the euro area, really would be "too big to save".

- Independent