Investors drove borrowing costs for Italy and Spain to 14-year highs, fueling sharp stock market drops in London, Frankfurt, Paris, Milan and Madrid. Though Italian and Spanish bonds later rebounded, borrowing rates for both nations remained dangerously high, at more than 6 percent — and closing in on the 7 percent threshold that eventually triggered bailout talks with Greece, Ireland and Portugal.
On Thursday, the head of the European Union’s executive called on eurozone leaders to consider further changes to the region’s bailout fund, including increasing its size, the Associated Press reported.
In a letter to leaders, European Commission President Jose Manuel Barroso urged “a rapid reassessment of all elements related to” the eurozone’s bailout fund to make sure it can effectively stop the debt crisis.
Also Thursday, the head of the European Central Bank, Jean-Claude Trichet, hinted that the bank might again buy bonds of Europe’s most financially troubled governments in an attempt to calm markets, the AP reported.
The bank also offered more emergency credit to banks, and indicated there was a greater chance that an interest rate hike once expected in October would be put off.
Concern on Wednesday focused on Italy, whose sheer size — it is the world’s seventh-largest economy — makes it potentially too big to bail out and would require radical new steps from already reluctant European leaders and the European Central Bank to prevent a full-blown crisis there. The day also saw volatile trading in the bonds of Belgium and even France as fears grew that Europe may be forced into a costly rethink of how to preserve its common currency, the euro.
The trouble in Italy and Spain came amid more signs that European economies are rapidly slowing as nations across the continent tighten their fiscal belts to combat high debt loads. At the same time, economists warn, the spending cuts in the U.S. debt agreement could undercut the anemic U.S. economic recovery. Concerns about slower growth are already rattling global markets and raising the prospect that European countries will have an even harder time than anticipated restoring themselves to health.
Underscoring the urgency, Italy’s embattled prime minister, Silvio Berlusconi, delivered an emergency address to Parliament, rejecting renewed calls for his resignation while defiantly warning that speculators are wrong to bet against Italy. He also seemed to draw a line in the sand with investors demanding more cuts, revealing no new austerity plans and calling economic growth the country’s best defense.
“We have sound economic fundamentals,” he said.
The anxiety spread as a broad plan by European leaders reached last month in an attempt to finally contain the region’s nearly two-year-old debt crisis was failing to calm investors. Led by Germany and France, the 17 nations that use the euro agreed to again shore up near-bankrupt Greece while offering new pledges to aid member countries in crisis.