Nicolas Sarkozy and Angela Merkel have told Italy that urgent action is needed to improve its finances ahead of a euro-saving summit tomorrow.
Berlusconi has previously promised to impose a degree of austerity, only to scrap plans or have coalition partners prevent him from acting. Reforms to Italy’s generous state pensions system are top of the agenda.
Eurozone officials also talked yesterday of haircuts of up to 60 per cent for Greek bond holders to help the nation to avoid a default, sending shares in the country’s heavily-exposed banks tumbling.
Leaders are planning on boosting the Eurozone’s bailout fund to try and shore up the faltering finances of Italy and Spain, as well as Greece.
A plan to recapitalise banks, protect Italy and Spain and to resolve the Greek crisis was meant to be in place by last Sunday’s summit – but rows over the best way to bulk up the bailout fund prevented that.
The European Financial Stability Facility is now likely to be leveraged from its current €440bn to around €1 trillion, bolstering its spending power without adding to the cost to governments. It is now thought that either one or both of two German plans will be used.
One method is to use the fund to take the losses on the first 20 per cent or so of Italian and Spanish government bonds.
The second part is to create a special purpose vehicle (SPV) with money from the EFSF and private investors to buy sovereign debt.