Financial markets piled pressure on peripheral eurozone countries on Monday as investors worried about heightened risks in Spain and Greece and fresh concerns over Italy. A weekend wipe-out of Spain's ruling Socialists in regional and municipal elections raised fears of potential clashes over deficit curbs between central and local government as Madrid fights to avoid following Greece, Ireland and Portugal into a bailout.
Italy, which has the eurozone's biggest debt pile in absolute terms, was hit by credit ratings agency Standard & Poor's decision on Saturday to cut its outlook to "negative" from "stable". In an explanatory statement, S&P said it did not expect Italy to seek financial help from the EU or the IMF due to the "absence of significant imbalances". The sheer size of its public debt effectively made it too big to bail out effectively.
Government sources said Rome would bring forward to next month planned decrees to slice 35 to 40 billion euros ($50-$56 billion) off the budget deficit in 2013 and 2014, in an effort to reassure markets.
"We've kept things in order and the bases are all there for us to continue to do so," Economy Minister Giulio Tremonti said. The premiums charged by investors to hold Italian and Spanish 10-year bonds rather than safe-haven German bunds rose to their highest levels since January, at 186 and 261 basis points respectively.
"The key point is that the crisis seems to be taking hold even of peripheral countries regarded as solid," said WestLB rate strategist Michael Leister. "Sentiment is that there appears to be no end to it now Italy is being scrutinised by the ratings agencies."
The euro briefly fell below a key support level at $1.40, hitting a two-month low against the dollar, before stabilising. Similar concerns also hit stocks, with the Milan exchange falling 3.3 percent and the broader FTSEurofirst 300 index losing 1.6 percent on the day. The shared European currency has lost as much as 6.5 percent against the dollar over three weeks, mainly through debt worries and despite a favourable interest rate differential.
Indeed, investors are trimming their expectations of how aggressively the European Central Bank will raise rates as a result of spreading stress in the sovereign bond market, according to Euribor futures data. Stratospheric Greek debt yields rose still further - with 10-year bonds yielding more than 17 percent - amid uncertainty over a 12 billion euro aid disbursement next month which is critical to meet 13.4 billion euros in funding needs, including debt redemptions, in mid-June and avoid default.
The Greek yields do not reflect Athens' real borrowing costs because the country is surviving on IMF/EU loans and trading in Greek bonds is thin, but it is a barometer of market anxiety about some form of debt restructuring. The Greek cabinet discussed new emergency deficit cutting measures to try to persuade international lenders to keep aid funds flowing, and convince investors the country can cope without a debt restructuring.
Visiting inspectors from the European Commission, the European Central Bank and the International Monetary Fund are withholding judgement on Greece's compliance with its rescue programme until they see progress on spending cuts, revenue increases and stalled privatisations.
Among planned new belt-tightening measures were deeper cuts in public sector wages, more consumer tax increases and even the taboo issue of dismissing full-time civil servants. A government official said after the meeting that Greece will launch the first wave a 50 billion euro privatisation programme by selling Hellenic Postbank and the ports of Piraeus and Thessaloniki. He gave no timeframe.
A second phase will include stakes in Public Power Corp, OTE Telecom and Athens Water. The chairman of the 17-nation Eurogroup of finance ministers of countries sharing the currency, Jean-Claude Juncker, said on Saturday that Greece has fallen behind targets and should set up a trustee institution for privatisations.
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