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Brussels - The European Union's top finance officials are to hold critical talks on Greece and the worsening situation in Italy on Monday, amid acute concerns about the risk of further sovereign debt contagion.
Herman Van Rompuy, the president of the European Council, will meet European Central Bank (ECB) president Jean-Claude Trichet and Jean-Claude Juncker, the chairperson of the Eurogroup, for talks in Brussels around midday, ahead of a meeting of the 17 eurozone finance ministers later on Monday.
Van Rompuy's spokesperson described the gathering - which also includes European Commission president Jose Manuel Barroso and the EU's economic and monetary affairs commissioner, Olli Rehn - as a "coordination, not a crisis meeting", and said Italy would not be on the agenda.
However, senior EU sources said it would be impossible not to discuss the situation in Italy, the eurozone's third-largest economy, following a large sell-off in Italian assets that the Italian media have dubbed "black Friday".
Vittorio Grilli, director general of the Italian treasury, will also attend the pre-Eurogroup meeting in his capacity as chairperson of the EU's economic and financial committee.
Shares in Italy's biggest bank, Unicredit Spa, gyrated wildly on Monday after losing 7.9% on Friday, partly because of worries about the results of stress tests of European banks that will be released on July 15. Other banks' stocks also fell heavily.
The cost of insuring Italian debt against default jumped to a record high, with five-year credit default swaps rising 30 basis points to 279 basis points, according to data monitor Markit. The cost of insuring Greek, Portuguese and Irish debt against default also rose.
The sell-off has increased fears that Italy, with the highest sovereign debt ratio relative to gross domestic product in the eurozone after Greece, could be next to suffer in the crisis. If that came to pass, the eurozone's existing rescue mechanism, the EFSF, would have insufficient funds to help.
The 10-year yield spread between Italian and German debt widened to a fresh euro era high of 258 basis points and bond yields neared the 5.5% to 5.7% area, which some bankers say will start putting heavy pressure on Italy's finances.
The market pressure is due partly to Italy's high sovereign debt and sluggish economy, but also due to concern that Prime Minister Silvio Berlusconi may be trying to push out his long-time finance minister, Giulio Tremonti, who has promoted deep spending cuts to control the budget deficit.
"We can't go on for many more days like Friday," a senior ECB official told Reuters. "We're very worried about Italy."
German newspaper Die Welt quoted an unnamed ECB source as saying the EFSF may have to be doubled in size to €1.5 trillion if it is to be capable of coming to the aid of Italy.
Accepting default?
Monday's gathering of eurozone finance ministers will focus on a second bailout package for Greece and the need to secure the private sector's involvement in the assistance programme, which is expected to total €110bn.
Germany, the Netherlands, Austria and Finland are determined that banks, insurers and other private holders of Greek government bonds should bear some of the costs of helping Athens up to €30bn of the total package.
But after more than two weeks of negotiations with bankers represented by the Institute of International Finance (IIF), a lobby group, there has been next to no progress on agreeing a formula acceptable to all sides.
Initially, talks focused on a complex French plan for private creditors to roll over up their holdings of Greek debt, buying new bonds as their existing ones matured.
But as that plan has floundered, Berlin has revived a proposal to swap Greek bonds for longer-dated debt that would extend maturities by seven years. Proposals to buy back Greek bonds and retire them have also been floated.
However, both those plans would likely be regarded by ratings agencies as a default, or at best a selective default, which could have profound repercussions for global financial markets. The ECB has said it will not accept anything that is termed a default, a position Germany also maintains.
"All of the efforts so far have been in order to avoid default because no one is quite sure what its knock-on effects would be," one EU official said. "Nobody wants a default - it's not an option."
In a buy-back, the EFSF bailout fund might buy Greek bonds from the market, or lend Greece money to do so. However, these schemes would require changes to the EFSF's rules which would require the backing of national parliaments, officials say.
If eurozone finance ministers do back the idea of a buy-back or a debt swap in an effort to move ahead more rapidly with a second package for Greece, it would effectively mean condoning a default in order to achieve a writedown in the value of Greek debt and make its debt mountain more sustainable.
Senior eurozone officials worry that any further delay in putting together a second package - which Greece wants by early September - could further poison investors' confidence in weak economies around the region, prompting more contagion.
"We need to move on this in the next couple of weeks. It's not a case of waiting until late August or early September as Germany is saying. That's too late and markets will make us pay for it," a top eurozone official told Reuters on Saturday.
German officials insist they too want to put together the second Greek bailout as quickly as possible, but the private sector's contribution is proving to be a major sticking point.
Herman Van Rompuy, the president of the European Council, will meet European Central Bank (ECB) president Jean-Claude Trichet and Jean-Claude Juncker, the chairperson of the Eurogroup, for talks in Brussels around midday, ahead of a meeting of the 17 eurozone finance ministers later on Monday.
Van Rompuy's spokesperson described the gathering - which also includes European Commission president Jose Manuel Barroso and the EU's economic and monetary affairs commissioner, Olli Rehn - as a "coordination, not a crisis meeting", and said Italy would not be on the agenda.
However, senior EU sources said it would be impossible not to discuss the situation in Italy, the eurozone's third-largest economy, following a large sell-off in Italian assets that the Italian media have dubbed "black Friday".
Vittorio Grilli, director general of the Italian treasury, will also attend the pre-Eurogroup meeting in his capacity as chairperson of the EU's economic and financial committee.
Shares in Italy's biggest bank, Unicredit Spa, gyrated wildly on Monday after losing 7.9% on Friday, partly because of worries about the results of stress tests of European banks that will be released on July 15. Other banks' stocks also fell heavily.
The cost of insuring Italian debt against default jumped to a record high, with five-year credit default swaps rising 30 basis points to 279 basis points, according to data monitor Markit. The cost of insuring Greek, Portuguese and Irish debt against default also rose.
The sell-off has increased fears that Italy, with the highest sovereign debt ratio relative to gross domestic product in the eurozone after Greece, could be next to suffer in the crisis. If that came to pass, the eurozone's existing rescue mechanism, the EFSF, would have insufficient funds to help.
The 10-year yield spread between Italian and German debt widened to a fresh euro era high of 258 basis points and bond yields neared the 5.5% to 5.7% area, which some bankers say will start putting heavy pressure on Italy's finances.
The market pressure is due partly to Italy's high sovereign debt and sluggish economy, but also due to concern that Prime Minister Silvio Berlusconi may be trying to push out his long-time finance minister, Giulio Tremonti, who has promoted deep spending cuts to control the budget deficit.
"We can't go on for many more days like Friday," a senior ECB official told Reuters. "We're very worried about Italy."
German newspaper Die Welt quoted an unnamed ECB source as saying the EFSF may have to be doubled in size to €1.5 trillion if it is to be capable of coming to the aid of Italy.
Accepting default?
Monday's gathering of eurozone finance ministers will focus on a second bailout package for Greece and the need to secure the private sector's involvement in the assistance programme, which is expected to total €110bn.
Germany, the Netherlands, Austria and Finland are determined that banks, insurers and other private holders of Greek government bonds should bear some of the costs of helping Athens up to €30bn of the total package.
But after more than two weeks of negotiations with bankers represented by the Institute of International Finance (IIF), a lobby group, there has been next to no progress on agreeing a formula acceptable to all sides.
Initially, talks focused on a complex French plan for private creditors to roll over up their holdings of Greek debt, buying new bonds as their existing ones matured.
But as that plan has floundered, Berlin has revived a proposal to swap Greek bonds for longer-dated debt that would extend maturities by seven years. Proposals to buy back Greek bonds and retire them have also been floated.
However, both those plans would likely be regarded by ratings agencies as a default, or at best a selective default, which could have profound repercussions for global financial markets. The ECB has said it will not accept anything that is termed a default, a position Germany also maintains.
"All of the efforts so far have been in order to avoid default because no one is quite sure what its knock-on effects would be," one EU official said. "Nobody wants a default - it's not an option."
In a buy-back, the EFSF bailout fund might buy Greek bonds from the market, or lend Greece money to do so. However, these schemes would require changes to the EFSF's rules which would require the backing of national parliaments, officials say.
If eurozone finance ministers do back the idea of a buy-back or a debt swap in an effort to move ahead more rapidly with a second package for Greece, it would effectively mean condoning a default in order to achieve a writedown in the value of Greek debt and make its debt mountain more sustainable.
Senior eurozone officials worry that any further delay in putting together a second package - which Greece wants by early September - could further poison investors' confidence in weak economies around the region, prompting more contagion.
"We need to move on this in the next couple of weeks. It's not a case of waiting until late August or early September as Germany is saying. That's too late and markets will make us pay for it," a top eurozone official told Reuters on Saturday.
German officials insist they too want to put together the second Greek bailout as quickly as possible, but the private sector's contribution is proving to be a major sticking point.
