EU chief: Euro crisis is spreading

4 August 2011 Last updated at 10:10 ET

Mr Barroso said the debt markets’ treatment of Spain and Greece was “a cause of deep concern”

European Commission President Jose Manuel Barroso has warned that the sovereign debt crisis is spreading beyond the periphery of the eurozone.

In a letter to European governments, he called on them to give their “full backing” to the euro currency zone.

He also said governments should rapidly re-assess the European Financial Stability Fund (EFSF) to reduce the risk of contagion in the eurozone.

It is being reported that the European Central Bank has been buying bonds.

Sources quoted by Reuters said that the bonds being bought were those issued by Portugal and the Irish Republic – crisis-hit countries who have found it more expensive to borrow on the open markets – and that the ECB had no plans to buy any other bonds.

Stockmarkets across Europe have been falling.

In mid-afternoon trading, the FTSE 100 was down 1.9%, the Dax in Frankfurt down 1.4% and the Cac 40 in Paris down 1.7%.

In response to the latest Greek crisis, the eurozone countries agreed changes to the EFSF on 21 July, which would widen its scope and allow it to intervene on the markets.

The changes have not yet been ratified by individual member states.

The EFSF was set up to try to maintain stability in the eurozone by lending up to 440bn euros to its member states.

A spokesman for the German finance ministry said European countries should focus on ratifying the existing agreements rather than changing them.

“It is not clear how reopening the debate only two weeks after the summit would contribute to the calming of markets,” he said.

Mr Barroso said that they needed to, “accelerate the approval procedures for the implementation of these decisions so as to make the EFSF enhancements operational very soon”.

He described the bond markets’ treatment of Italy and Spain as “a cause of deep concern”.

‘Complexity and incompleteness’

So far, Greece, Portugal and the Irish Republic – known as the eurozone’s periphery countries – have needed bailouts. The European Commission is concerned that it might not be able to afford to rescue Italy and Spain, which have the eurozone’s third and fourth largest economies.

Mr Barroso said: “Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis.

“Markets highlight, among other reasons, the global economic uncertainties due to both economic growth and the protracted decision on budgetary adjustments in the US but, first and foremost, the undisciplined communication and the complexity and incompleteness of the 21 July package.”

Despite the package agreed for Greece on 21 July, bond yields for Spain and Italy have been increasing, hitting euro-era highs this week.

Spain held a bond auction on Thursday and found that the amount it was having to pay to borrow money had increased considerably.

The activity on the bond markets appears to have prompted the fresh urgency from Mr Barroso, but analysts are not convinced that governments will be able to comply with his wishes.

“The problem is that the changes that need to be implemented have to be agreed on by national parliaments and everyone’s on holiday because it’s August,” said Peter Westaway, chief economist at Nomura.

“So there’s no realistic prospect of it all being ticked up until September at the very earliest and so there needs to be more of an indication of what might be done.”

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Five-point plan

In Italy, Prime Minister Silvio Berlusconi has been continuing his attempts to calm the markets, which began with a speech on the economy to parliament.

Mr Berlusconi has now met union leaders and employers’ representatives, who presented him with a five-point joint proposal on how to combat speculation against Italy in eurozone markets.

The details of the five-point plan have not yet been made public.

Mr Berlusconi’s speech to parliament took place after the markets had closed on Wednesday. On Thursday, Milan’s main stock market index was down 2.1% in mid-afternoon trading.

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