Debt dismay

Markets fell sharply throughout Europe after the President of the European Commission expressed doubts about the efficacy of the European rescue fund designed to bail out struggling members of the euro currency zone. His remarks stoked fears that crippling debt contagion was already spreading beyond the EU's "periphery" countries.

In a letter to the 27 European heads of government, Jose Manuel Barroso urged Thursday "a rapid re-assessment of all elements related to the EFSF and concomitantly the ESM in order to ensure that they are equipped with the means for dealing with contagious risk."

"It is clear that we are no longer managing a crisis just in the euro-area periphery," he warned, in comments likely to have a destabilizing effect among European political leaders.

Markets unconvinced

Stock markets around the continent suffered significant losses following Barroso's comments late Thursday. In Frankfurt, the DAX fell 3.40 percent, whilst in London the benchmark FTSE 100 index of top shares dropped 3.43 percent. In Paris, the CAC 40 dropped 3.90 percent, as falls of more than 3 percent were also recorded in Madrid, Amsterdam, Milan and Switzerland.

The New York Dow Jones index followed the European example, dropping 4.31 percent. This is its worst one-day drop since the financial crisis. The other major Wall Street indices Nasdaq and Standard & Poor's did likewise, plunging 5.1 percent and 4.8 percent respectively.

The markets were also responding to a warning by the head of the European Central Bank, Jean-Claude Trichet, who described the risks faced by the European economy as "unusually high."

The EFSF (European Financial Stability Facility) was created to deal with the Greek debt crisis. The ESM (European Stability Mechanism) is due to succeed it mid-2013.

The eurozone periphery commonly refers to Ireland, Portugal and Greece, all of which have been struggling under unsustainable levels of debt and have sought financial aid deals from the EU and International Monetary Fund. Those bailout deals have sparked angry protests and street clashes in several countries, most notably Greece.

New threat

Focus has now shifted to Italy and Spain, and fears are growing that the EFSF may not be substantial enough to cope if both countries required bailing out.

Both currently have borrowing costs hovering around the 6.0-percent mark. In the cases of Greece, Ireland and Portugal, all three were forced to request aid once borrowing costs had reached an unbearable 7.0 percent.

Barroso said that developments in Italy and Spain - the eurozone's third- and fourth-largest economies, respectively - were a "cause of deep concern. … In fact, the tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis."

Asked what elements of the EFSF or ESM Barroso wanted reassessed, commission spokeswoman Karolina Kottova clarified that "all elements might well include size" as well as the "flexibilization" of the 440-billion-euro ($625 billion) EFSF and the 750-billion-euro ESM.

Still not enough

Barroso also said agreements reached between EU leaders at a special summit on July 21 needed immediate implementation. Leaders had gathered in a bid to solve the Greek debt crisis threatening to bring down the eurozone.

A deal was struck involving the role of private and public creditors in the euro area's crisis management procedures. Agreement was also reached on enhancing the effectiveness of the EFSF by reforming euro area governance structures.

But Barroso said the July 21 agreements giving the EFSF the possibility of "precautionary use, recapitalization of banks and intervention in secondary bond markets, are not having their intended effect on the markets."

He attributed market pressure on euro states to slow global growth and US debt problems, as well as, "first and foremost, uncoordinated communication and the complexity and incompleteness of the July 21 package."

German doubts

However, a spokesman for the German Finance Ministry rejected any amendments to the EFSF so soon after the July 21 meeting. "It is impossible to tell whether we should reopen this debate only two weeks after the summit in order to calm the markets," said spokesman Martin Kotthaus in Berlin on Thursday. "The important thing now is to rapidly implement the decisions made at the summit. We should be focusing on this and avoid raising questions that were already answered on July 21."

Market tensions have forced up borrowing costs for all eurozone economies with the exception of the area's standout performer Germany.

There were also fears that the involvement of private lenders in a second Greek bailout could set a precedent for any future bailout of a eurozone member. This was despite pledges that this arrangement was limited to Greece.

Author: Darren Mara (AFP, Reuters)
Editor: Michael Lawton