Financial market pressure on Italy intensified on Tuesday, sucking Europe's second biggest debtor nation deeper into the euro area danger zone and prompting emergency consultations in Rome and among European capitals. Italian and Spanish bond yields hit their highest levels in 14 years, with five-year Italian yields ominously touching the same level as Spain's in a sign Rome is overtaking Madrid as a focus of investors' concern about debt sustainability.
Italy's stock index fell to its lowest in more than 27 months, dragged down by banks with a heavy exposure to Italian debt. European shares hit a 9-month low amid worries that slowing economic growth will make it even harder to overcome the eurozone's debt troubles.
"The fear of the market is that the world is going into recession again ... and in the eurozone the peripheral markets are the ones that will suffer most," said Alessandro Giansanti, strategist at ING in Amsterdam. Economy Minister Giulio Tremonti called a meeting of the Financial Stability Committee - made up of representatives of the government, the Bank of Italy, market regulator Consob and insurance authority ISVAP - a day before Prime Minister Silvio Berlusconi is due to break his silence and address parliament.
Spanish Prime Minister Jose Luis Rodriguez Zapatero postponed his departure for vacation to monitor economic developments after the risk premium on his country's debt over benchmark German bonds rose to a euro lifetime high of more than 4.0 percentage points.
Jean-Claude Juncker, who chairs the Eurogroup of eurozone finance ministers, said he would meet Tremonti in Luxembourg on Wednesday, as signs grew that a second Greek bailout agreed less than two weeks ago had brought no respite for the currency bloc. Spain's economy ministry told Reuters it was in contact with fellow European governments - particularly Germany, Italy and France - about the situation in the markets.
Zapatero last week called an early general election for November 20. The conservative opposition Popular Party has a 14 point lead over his Socialists in opinion polls, but any narrowing towards an indecisive result could spook investors. Elsewhere in Europe, leading policymakers are on summer holiday after reaching a July 21 summit agreement on a second financial rescue for Greece, the worst hit eurozone debtor, that was meant to buy market calm at least until September. International bodies offered Italy and Spain verbal support.
The European Commission said both Rome and Madrid were taking necessary action to keep their economies on track and "We are confident in their abilities". The head of the Organisation for Economic Co-operation and Development, a rich nations' intergovernmental think-tank, told Reuters that Italy had its public finances under control and was taking the right decisions to reduce its deficit.
"Therefore it does not need foreign savings to finance its deficits and therefore it is OK," OECD Secretary-General Angel Gurria said in an interview in Athens, noting that Italy had a high domestic savings rate. Italy is in the firing line partly because at 120 percent of economic output it has the highest debt-to-gross-domestic-product ratio of any euro zone nation except Greece, which is nearing 160 percent.
But political instability in Rome's centre-right coalition has fuelled market concern, with Berlusconi on trial for alleged tax evasion and sexual relations with a minor, and Tremonti under fire over his use of an apartment owned by an aide under investigation for alleged corruption.
Bank of Italy Governor Mario Draghi, due to take over as head of the European Central Bank in November, met Italian President Giorgio Napolitano for the second time in a week in a sign of the seriousness of the financial situation. Amid the turmoil, Italian market regulator Consob has requested information from Deutsche Bank on the recent massive reduction of its holdings of Italian bonds, the economy ministry said.
Deutsche's second quarter results showed it had cut its net Italian sovereign exposure from 8 billion euros at the end of 2010 to 997 million euros by the start of July, the ministry said in a statement. The eurozone and the International Monetary Fund have already had to grant bailouts to Greece, Ireland and Portugal. Tiny Cyprus may be next in line due to its banks' exposure to Greek debt, and economic fallout from an explosion last month that destroyed its sole electrical power station. But Brussels sought to counter reports that Italy may not contribute to the next round of aid for Greece because its own borrowing costs are now well above the 3.5 percent rate at which the money will be lent on to Athens.