The Eurozone’s inability to thrash out a new package leaves the region exposed to the growing threat of contagion, which saw the interest on Spanish 10-year debt jump 30 basis points to over six per cent and 10-year yields on Italian debt shoot up 40 per cent to break through 5.7 per cent yesterday. Seven per cent is seen as a key threshold at which Rome’s debt – forecast to reach 120 per cent of GDP – will become unaffordable.
In a statement yesterday night, Eurogroup ministers reaffirmed their “absolute commitment to safeguard financial stability in the euro area”.
The talks foundered after two weeks in which France and Germany attempted to cobble together a deal that would share the costs of Greece’s new rescue, likely to be worth at least €100bn, with the private sector.
But a French proposal to get banks to shoulder some of the pain was dealt a fatal blow by ratings agencies, which said it would likely amount to a form of “credit event” or default.
The impasse culminated in a press conference last week at which ECB president Jean-Claude Trichet would say only: “There will be no default.”
Markets spent the day in panic mode under the cloud of Italian contagion. The spread between 10-year Italian debt and bunds reached three per cent, while investors fled the country’s major lenders. Unicredit plunged 6.6 per cent and Intesa Sanpaolo lost 7.3 per cent.