Monday

10th Aug 2020

EU 'astonished' at soaring costs for Italy and Spain

  • Van Rompuy arriving in Spain last month. Market fears are "totally out of line" he wrote in the op-ed (Photo: consilium.europa.eu)

Spain and Italy's record borrowing costs are 'astonishing' after a eurozone deal reached less than two weeks ago, EU Council President Herman Van Rompuy said on Tuesday (2 August).

Italian and Spanish 10-year bonds dropped in value, while German bunds rose on Tuesday, pushing the difference in costs (yields) to 381 and 397 points, respectively - a record high since the euro was introduced 12 years ago.

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The valuations reflect persisting market concerns that the eurozone crisis is far from over and that a Greek-style bailout with a partial default and private sector involvement may be on the cards for other troubled Mediterranean countries.

Cyprus has also made headlines after its economy was dealt a blow on 11 July when 2,000 tonnes of gunpowder stored inappropriately under open sky exploded, wiping out the island's main electric power plant. Political instability and exposure to Greek debt are adding to the mix, with ratings agencies predicting it may be the next country in line for a bailout.

So far, the EU commission is maintaining the same line as for other countries which ultimately were given a financial rescue package - that nothing of that sort is being discussed.

"The question of a programme of emergency aid is certainly not on the table," Chantal Hughes, a commission spokeswoman for economic affairs said on Tuesday in a press conference.

Spanish Prime Minister Jose Luis Rodriguez Zapatero delayed his holiday departure and Italian finance minister Giulio Tremonti decided to travel to Luxembourg on Wednesday for a snap meeting with Jean Claude-Juncker, chair of the eurozone finance minsters' meetings.

For his part, Van Rompuy, who brokered the eurozone deal on Greece, precipitated by the very same rising costs as for the Italian government, has tried to allay market fears in an op-ed published in several European newspapers.

"Astonishingly," he writes, "since our summit the cost of borrowing has increased again for a number of euro area countries. I say astonishingly, because all macro economic fundamentals point in the opposite direction."

The Greek bailout conditions are "exceptional" and mark no precedent for other countries, he added.

Citing the austerity measures adopted in Italy and Spain, as well as Madrid's low debt, Van Rompuy accused the markets of making risk assessments "totally out of line with the fundamentals." Ratings agencies which downgraded the two countries also acted in a "ludicrous" way when putting them in the top tier of default risk countries, he claimed.

He omitted to mention that the Spanish premier last week called for early elections in November, faced with growing public anger over soaring unemployment, a factor which has been aggravated by the austerity measures.

The true cause of market worries, in Van Rompuy's view, lies elsewhere - the aftermath of the financial crisis of 2008 and the interdependence with the debt-stricken US.

"It is imperative to bear in mind that this is not a crisis about the euro," he wrote.

Meanwhile, a French plan to have more regular eurozone leaders' meetings formalised in a "euro-council" may be presented at the end of the month if Berlin agrees to the proposal.

Speaking to Le Figaro, Luxembourg's Juncker said Tuesday that Van Rompuy would be the "logical and natural choice" to chair such meetings.

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