Italy the key to whether euro rescue plan will work

Silvio Berlusconi, Italy’s embattled prime minister, attacked the euro as a “currency that has not convinced anyone” after interest rates on Italy’s massive national debt rose to their highest levels since the single currency was launched.

As doubts started to emerge about the “grand plan” to save the euro, investors demanded a high price to buy the country’s bonds in a show of no confidence barely 48 hours after Europe’s leaders had agreed a new rescue blueprint for the eurozone.

“There is an attack on the euro which, as a currency, has not convinced anyone, because it does not belong to any one country, but to lots that do not, however, have a single government, nor a bank of reference and guarantees,” Berlusconi said on Friday night.

The TV mogul who leads the Italian right said: “The euro is an unprecedented phenomenon. That’s why there’s a speculative attack and [why] it is also turning out to be difficult to place sovereign bonds [in the market].”

The price Italy paid — more than 6% — to sell 10-year bonds alarmed financial experts who say the country’s borrowing costs are one key measure of success for the euro rescue package, which was designed to shore up confidence in the eurozone’s third largest economy. Italy is also the eurozone’s largest bond market.

Elisabeth Afseth, bonds expert at Evolution, said: “It hasn’t been easy to convince investors to buy Italian bonds yet. [The rescue package] was created with Italy in mind yet bond yields are back at 6% for 10 years which is an uncomfortable level. I don’t think this has given investors much comfort so far. Italy is the key for whether this works or not. I don’t think it’s looking overly promising at this stage.”

Hopes of an immediate cash injection from China into Europe’s €1-trillion European financial stability facility (EFSF) were also dashed after Klaus Regling, the head of the bailout, left a meeting in Beijing without a firm offer of support.

Doubts emerge over China injection
“We all know China has a particular need to invest surpluses,” Regling said in a reference to the country’s $3.2-tn foreign exchange reserves. But doubts are emerging about whether the Chinese will be prepared to take the risk of putting billions of euros into the fund.

The rise in Italy’s borrowing costs briefly took the shine off stock markets, which recovered some ground later, leaving Wall Street’s Standard & Poor’s 500 index on course for its best month since October 1974. The Dow Jones industrial average, the biggest index of US stock prices, has soared over 1200 points this month, breaking a record set in April 1999.

Jamie Farmer, executive director at Dow Jones indexes, said the mood had improved. “Recently there have been two significant narratives. First that the US was entering a second recession and second that the eurozone was falling apart,” he said. “People have taken a big deep breath. There seems to be a resolution to the euro crisis, while there is a difference of opinion on the strength of the package, confidence is picking up.”

After Thursday’s euphoria, the FTSE 100 index fell 11.5 to end at 5 702 as doubts surfaced about the eurozone rescue plan.

The French continued to place their hopes in investment from China to bolster the EFSF, which needs outside investors to increase its size from its current €440-billion. The French finance minister, Francois Baroin, told French radio: “The reality is that China is the third largest shareholder in the International Monetary Fund, and if China via the IMF wants to participate, not by saving Greece or the euro, but by participating in investment, that is a gesture of confidence.

“What is happening in Europe and creating instability is that public and private investors are pulling out.”

But economists doubt China will be prepared make an investment on a large enough scale. China’s officials “will not want to be seen to risk even more of their peoples’ capital on a potentially lost cause”, said Julian Jessop, chief global economist at Capital Economics.

Chris Leslie, the shadow financial secretary to the Treasury, used the run-up to the G20 meeting in Cannes next week to call on the coalition to back a financial transaction tax “implemented with the widest possible international agreement”. –

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