New Italian, Greek governments race to limit damage

Sun Nov 13, 2011 6:35pm EST
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By Philip Pullella and Harry Papachristou

ROME/ATHENS (Reuters) - Technocrat leaders in Italy and Greece rushing to form governments will face a critical test of their ability to limit the damage from the euro zone debt crisis when financial markets open on Monday.

Italy's president asked former European Commissioner Mario Monti on Sunday to form a government to restore market confidence in an economy whose debt burden is too big for the euro bloc to bail out.

Investors will pass initial judgment on his leadership when Italy's Treasury asks investors on Monday to bid for up to 3 billion euros ($4.1 billion) in five-year government bonds. At an auction last week, the government's borrowing costs surged above 6 percent and kept rising to levels well beyond what the country could afford to pay over the longer term.

Outgoing Prime Minister Silvio Berlusconi made a parting call on Sunday for the European Central Bank to become a lender of last resort to prop up the euro.

"This has become a crisis for our common currency, the euro,

which does not have the support that every currency should have," he said in a video message.

But ECB policymakers have made plain they want to keep the onus on governments to bring their debt burdens under control and have rebuffed world leaders who want the bank to ramp up its intervention on bond markets to defend Italy and other vulnerable debtors.

"Monetary financing (of government debt) will set the wrong incentives, neglect the root causes of the problem, violate the legal foundations on which we work, and destroy the credibility and trust in institutions," ECB governing council member Jens Weidmann told the Financial Times, adding he was confident "Italy will be able to deliver."   Continued...