Financial pressure on the euro zone intensified today, with the euro falling and Italy facing rising borrowing rates as EU measures to control its debt crisis left investors uncertain and anxious.
The euro fell under $1.30 for the first time since mid-September, dropping at one point to $1.2969, though it later recovered to stand at $1.3030 this evening.
There was also more pressure on 10-year borrowing rates for countries seen at risk of needing a rescue after Greece and Ireland, with particular attention focused on Spain as the size of its economy puts it in a far bigger problem category.
The borrowing rate for Spain rose to 5.57%, while Portugal's equivalent remained high at almost 7.2%. The gap between Spanish and benchmark German borrowing rates widened to three percentage points, an all-time high.
The differential is a 'short-term fluctuation', Spain's deputy finance minister Jose Manuel Campa insisted. Spain's Socialist government has introduced politically sensitive measures aimed at reviving the economy and slashing its public deficit, including an overhaul of the country's rigid labour market rules.
Italy too was under pressure today, with the spread between its 10-year rates and those of Germany widening to two percentage points for the first time. Italian bond yields jumped to 4.687%.
In addition to approving an €85 billion deal for Ireland on Sunday, European Union ministers outlined measures under which sovereign debt could eventually be re-structured, signalling that bondholders may have to bear some of the costs of future bail-outs.
Analysts warned that this the uncertainty could lead to bond market investors selling more euro zone government bonds.
Trichet speaks of euro zone 'determination'
European Central Bank president Jean-Claude Trichet has sought to soothe fears raised by the Irish debt crisis and called for stronger mutual budgetary surveillance by euro zone members.
Speaking in Brussels to the EU's parliamentary committee on economic and monetary affairs, Trichet said euro zone countries that benefit from international rescue packages are 'in a situation of solvency'.
Ireland and Greece have reached agreements with the EU and International Monetary Fund (IMF) on financial aid to help resolve massive problems with public deficits and debt.
Financial markets are now focusing on Portugal, and on Italy and Spain, two major euro zone economies. But Trichet stressed that 'observers are tending to underestimate the determination of the governments and the EU as a whole'.
He stressed that the euro zone economy was 'functioning' and had grown by more than expected this year. The ECB president agreed, however, that markets needed greater clarity from EU political leaders, in particular regarding the possibility that investors would suffer losses in the event that a euro zone country defaulted on its debt.
Though he did not refer specifically to such an event, Trichet said rules agreed to last weekend by euro zone finance ministers would be 'fully consistent with IMF policy' and would not automatically demand that private investors bear losses.
The ECB chief then issued an urgent call for euro zone governments to pay close attention to each other's budgets and enforce a mutual discipline to keep debt crises from happening again in the future.
