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EU Seeks To Calm Jumpy Markets


European leaders sought yesterday (2 August) to soothe concerns that the euro zone crisis is worsening as bond yields in Spain and Italy hit record levels and to dampen speculation that Cyprus is set to join the EU support mechanism.

Italian and Spanish bond yields both hit their highest level in the euro’s 11-year lifetime yesterday, as Rome joined Madrid as a chief focus of investors’ concern about debt sustainability.

Spanish PM Jose Luis Rodriguez Zapatero
Spanish PM Jose Luis Rodriguez Zapatero

Spain’s Prime Minister yesterday delayed holiday plans to monitor the euro zone debt crisis, whilst Italian economy minister – Giulio Tremonti – scheduled emergency talks for today between the Bank of Italy, market regulator Consob and insurance authority ISVAP.

Van Rompuy: ‘Greece unlike Italy and Spain’

In yesterday’s Le Monde, European Union President Herman Van Rompuy attempted to underline differences between Spain and Italy on the one hand, and the ‘unique’ situation in Greece, which he said was not comparable.

He added: “Current evaluations of risk on the markets do not correspond at all to fundamentals and it is ridiculous that … these countries [Italy and Spain] are considered the most likely to default on loan obligations.”

Cyprus meanwhile remains in political limbo following the Cypriot cabinet’s resignation last week (28 July) amidst pressure for a reshuffle after a massive munitions blast destroyed the island’s main power plant earlier in the month.

President Demetris Christofias has still not announced the reshuffle, whilst speculation that the country will require an EU bailout is mounting.

Commission: Cypriot rescue plan out of the question

On Monday (1 August) an official at international agency Fitch said it may reduce its rating on the island in the next days and weeks, and an extraordinary statement from the Bank of Cyprus (BoC) claimed there was an immediate threat of the island entering the EU support mechanism.

Chris Pryce, a director in Fitch’s Sovereign Group, told Reuters: “As we have made clear in past reports, we would be in favour of much more fiscal consolidation than has occurred.”

All three major credit rating agencies have downgraded Cyprus in the last several months with fresh cuts last week.

Asked whether there were concerns about the chance that the island would suffer another downgrade, a spokeswoman for the Commission dismissed the idea that the attention being given to Cyprus was out of the ordinary, saying: “The rating agencies are interested in all countries, all products and all companies.”

She added: “As far as Cyprus is concerned there is no question of a rescue plan. The Cypriot government has specific objectives to consolidate its finances and re-launch the economy, and we are confident that they are taking all necessary steps to fulfil these.”

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