Italy seeks EU political support in market turmoil (Reuters)

LUXEMBOURG/ROME (Reuters) – Italy sought European political support Wednesday as its stocks and bonds came under heightened attack in a selloff triggered by the euro zone’s debt woes and fears of a global economic slowdown.

Italian Economy Minister Giulio Tremonti met the chairman of euro zone finance ministers, Jean-Claude Juncker, for emergency talks as the yields on Italian and Spanish 10-year bonds flirted with new 14-year highs and bank shares plummeted.

Prime Minister Silvio Berlusconi, who has been largely silent, closeted with his lawyers over several ongoing trials, was due to address parliament later to try to calm markets.

“Italian and Spanish bond yields rose to their new record highs. This is a very alarming and scary thing,” Finnish Prime Minister Jyrki Katainen said.

“The whole of Europe is in a very dangerous situation,” he told public broadcaster YLE in an interview.

Less than two weeks after leaders of the 17-nation euro zone agreed on a second bailout for Greece, Europe’s worst hit debtor, and adopted measures meant to stem contagion to larger sovereigns, the debt crisis is back with full force.

With many policymakers on holiday, there seems little prospect of immediate European policy action, although Spain said Tuesday that the main euro zone governments had held telephone contacts on the situation in the markets.

German Economics Minister Philipp Roesler said Italy and Spain were not even discussed at Berlin’s weekly cabinet meeting Wednesday which he chaired in place of Chancellor Angela Merkel, who is on vacation and didn’t call in. He said he saw no reason for alarm on economic growth due to current developments.

The euro zone’s rescue fund cannot use new powers granted at last month’s summit to buy bonds in the secondary market or give states precautionary credit lines until they are approved by national parliaments in late September at the earliest.

The European Central Bank could reactivate its bond-buying program, which temporarily steadied markets last year but has been dormant for more than four months. Weekly data released on Monday show it has so far refrained from doing so despite market rumors to the contrary last week.

Italy and Spain could offer new austerity measures to try to placate the markets, but Rome has just adopted a 43 billion euro savings package and Madrid’s lame duck government has just called an early general election for November 20.

BANK SHARES HAMMERED

Shares in banks exposed to euro zone sovereigns, particularly in Italy, have taken a hammering and are having growing difficulty in securing commercial funding.

“Bank funding remains stressed for Southern Europe and remains a key source of risk for bank earnings, ability to lend and a drag on economic recovery,” Huw van Steenis, analyst at Morgan Stanley in London, said in a note.

“The risk of a credit crunch in Southern Europe is growing,” he added.

Shares in Italy’s Intesa Sanpaolo were briefly suspended limit down but recovered somewhat to be 1.5 percent down at 0800 GMT after data showed the Italian services sector contracted by less than expected in July.

France’s Societe Generale warned investors that it may miss its 2012 profit target after taking a 395 million euro pretax charge in the second quarter on its exposure to Greek debt, causing a 31 percent drop in quarterly net income.

The Swiss National Bank cut its interest rate target and said it would very significantly increase its supply of liquidity to try to bring down the value of the Swiss franc, which it said has become massively overvalued.

The currency has served as a refuge, along with gold, amid turbulence on global bond and stock markets driven by anxiety over a slowing U.S. economic recovery and the unresolved euro zone debt crisis.

Unlike in previous years, when trading volumes in euro zone bonds dropped off in the August holiday season, volumes in Italian BTP futures have been higher, although the bid/offer spread has widened, according to Reuters data.

Worries about Italy, the euro zone’s third largest economy and second biggest debtor, have been exacerbated by political instability in Berlusconi’s fractious center-right coalition.

The Italian parliament approved a 43 billion euro austerity program last month but doubts have lingered about a weakened government’s ability to enforce the cuts, and about the lack of structural reforms to boost Italy’s miserable growth rate.

“For both Spain and Italy, the 7 percent level in yields is the one everyone is focused on,” said West LB rate strategist Michael Leister.

“Although we’re still quite a decent amount away from that, any break of the 6.50 percent level is going to be a catalyst to get to those higher rates.

Wednesday, Spanish and Italian 10-year yields stood respectively at 6.28 and 6.16 percent. The gap between them has narrowed as Italy has overtaken Spain as the main focus of market concern about debt sustainability.

(additional reporting by Kirsten Donovan, Swaha Pattanaik and Alex Chambers in London, Gernot Heller in Berlin, Katie Reid in Zurich; writing by Paul Taylor; editing by Janet McBride)

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