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European markets shaken by fears for Italy, Spain

European markets shaken by fears for Italy, Spain

European financial markets were slammed Tuesday by fears that Italy and Spain would be dragged into the debt crisis, though investors found some relief in signs that Rome would speed up approval of austerity measures.
Stocks, the euro and government bonds tumbled, with the Milan exchange down 4 percent and the yield on Italy's 10-year bond trading above 6 percent at one point, suggesting investors are increasingly worried the country will not be able to handle its debts.
Rescuing Italy and Spain _ the third- and fourth-largest economies in the eurozone _ would simply be too expensive for the EU's rescue funds, so their stability is synonymous with that of the 17-nation currency bloc.
Traders were spooked by the fact that eurozone finance ministers remained vague in their promises of new support measures at a meeting in Brussels on Monday and suggested they would even accept a temporary default by Greece to get a bigger private sector contribution to a second bailout.
The prospect that Greece will be allowed to default on its debts _ and the lack of any detail on how that would happen or how it might impact countries like Italy _ proved toxic for markets.
"The risk of a major eurozone bank collapsing cannot be ruled out and this threat would only heighten a 'Lehman-style' moment," said Neil MacKinnon, a strategist at VTB Capital.
The finance ministers said they are considering broader powers for the region's bailout fund, such as buying up distressed bonds on the secondary market, as well as giving already bailed out countries more time to repay their loans and lower interest rates.
However, they did not reach a final deal on a new rescue package for Greece and moved away from earlier promises that any efforts to involve banks will not trigger a default rating from rating agencies.
That opens the door to more drastic plans for private sector involvement and renewed concerns about a lack of political will in the richer eurozone countries to stem the crisis.
Pressure in Italian markets only eased somewhat after Finance Minister Giulio Tremonti announced plans to accelerate Italy's austerity measures.
"I am going to Rome to close the budget," Tremonti told reporters as he left the ministers' meeting early.
Italian Senate President Renato Schifani asked that the upper house clear the cuts by Thursday before they go to the lower house for approval. The government had earlier said the measures would be completed only by August.
"I believe it is necessary and indispensable to give a cohesive signal abroad from our country, and it is important that we vote on the measures no later than Thursday," Schifani said.
The comments helped the Italian 10-year yield drop back down to 5.71 percent, while the Milan stock index cut its losses to trade only 0.3 percent lower.
Tuesday is the last day for any amendments to the (EURO)48 billion ($67 billion) package that aims to balance the budget by 2014. Commentators urged lawmakers to cut spending on bureaucracy during this legislative period, which ends in 2013, and not delay it to a future government.
"I would say that the best medicine could be to issue measures to contain the public debt in a quick and incisive way, this is what the markets are asking for, and this could be the recipe to allow this down trend to stop, a trend which is having a very negative impact on Italian investors," Patrizio Passagnia, an investment banker at Insigner de Beaufort Bank's Rome offices.
Amid the market turmoil, Italy raised (EURO)6.75 billion ($9.49 billion) from the markets in an auction of 12-month debt. Though it was oversubscribed, the yield rose sharply to 3.67 percent, from 2.15 percent at a similar auction a month earlier.
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McHugh reported from Brussels. Gabriele Steinhauser in Brussels and Maria Grazia Murru in Rome contributed to this report.


Updated : 2020-11-30 20:34 GMT+08:00