Spain, Italy vow action as borrowing costs soar

Thu Jun 14, 2012 3:09pm EDT
 
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By Noah Barkin and Feliciano Tisera

BERLIN/MADRID (Reuters) - Spain and Italy, under increasing fire in Europe's debt crisis, promised new measures to repair their public finances as their soaring borrowing costs raised new alarm ahead of a cliffhanger Greek election.

But German Chancellor Angela Merkel rebuffed pressure from EU partners and the United States for Europe's most powerful economy to underwrite debt or guarantee bank deposits in the single currency area.

Spain's 10-year bond yield hit a euro lifetime high above 7 percent on Thursday - a danger level above which Greece, Ireland and Portugal were driven to seek international rescues - despite last weekend's euro zone agreement to lend Madrid up to 100 billion euros ($125 billion) to recapitalize ailing banks.

"It is not a situation that can be maintained over time... and I am convinced that we will continue to take more measures in the coming days and weeks to help bring it down," Spanish Economy Minister Luis de Guindos told reporters in the corridors of parliament.

In Rome, Parliamentary Affairs Minister Piero Giarda, in charge of a public spending review, said Italy will seek to cut 5 billion euros in state administration spending this year instead of a previously announced 4.2 billion euros. The money saved would help fund areas hit by two earthquakes last month.

Moody's Investor Service slashed Spain's sovereign credit rating by three notches to Baa3, just one level above junk, late on Wednesday, citing the government's "very limited" access to international debt markets and the weakness of the economy.

The downgrade added to a sense of emergency in financial markets ahead of an election in debt-plagued Greece on Sunday that could deliver a mandate to an anti-bailout party.

Addressing parliament in Berlin, Merkel rejected "miracle solutions" such as issuing joint euro bonds or creating a Europe-wide deposit guarantee scheme, backed by new French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy.   Continued...

 
German Chancellor Angela Merkel delivers a government statement on her policy plans for the upcoming Mexico G-20 summit at the Bundestag, the German lower house of parliament, in Berlin June 14, 2012. REUTERS/Thomas Peter