Italy eyes euro zone aid to ease debt pain

Tue Jul 10, 2012 11:54am EDT
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By Francesca Landini and Robin Emmott

BRUSSELS (Reuters) - Italy said on Tuesday it may want to tap euro zone aid to ease its borrowing costs as finance ministers struggled to convince markets they are getting a grip on the bloc's debt crisis, which a top European Central Banker said could escalate.

Prime Minister Mario Monti, who is under intense market pressure to shape up his economy and avoid being drawn into the center of the debt crisis, said Italy could be interested in tapping the euro zone's rescue fund for bond support.

"It would be hazardous to say that Italy would never use (this mechanism)," he said after a meeting of European finance ministers in Brussels. "Italy may be interested."

He is worried by a rise in Italian bond yields, which were slightly below 6 percent on Tuesday having bounced above the day before. A sustained period above that threshold could open the way to 7 percent, beyond which servicing costs are widely deemed unsustainable.

Monti's comments show the 2-1/2 year-old euro zone crisis risks engulfing Italy, the bloc's third-largest economy and a member of the Group of Seven economic powers that is widely viewed as too big to bail out.

Overnight, finance ministers outlined an aid package for Spain - the euro zone's fourth-largest economy - but they struggled to convince markets it would help stabilize the bloc.

The ministers agreed to grant Madrid an extra year until 2014 to reach its deficit reduction targets in exchange for further budget savings. They also set the parameters of an aid package for Spain's ailing banks.

The decisions were aimed at preventing Spain, mired in a worsening recession, from needing a full state bailout which would stretch the limits of Europe's rescue fund and plunge it deeper into a debt crisis.   Continued...

Germany's Finance Minister Wolfgang Schaeuble reacts during the hearing on the European Stability Mechanism (ESM) and the fiscal pact at German Constitutional Court in Karlsruhe July 10, 2012. REUTERS/Alex Domanski