European finance officials were working intensively on short-term ways to stabilise Spanish and Italian borrowing costs today as EU leaders opened a summit divided on how to resolve the euro zone's debt crisis.
The euro hit a three-week low and European shares fell as investors bet that this latest summit would fail to produce concrete measures to tackle the crisis, sending 10-year Spanish government bond yields above the danger level of 7 per cent.
Italy had to pay its highest yield since December of 6.19 per cent to sell 10-year debt today, helped by domestic demand and a smaller-than-average sale. Italy sold €5.42 billion in five- and 10-year bonds, near the top of its planned issue range.
The yield on a September 2022 bond rose further from an end-May level of 6.03 per cent. The €2.9 billion sale was covered 1.3 times, slightly down from a month ago.
French president Francois Hollande, arriving for his first full European Union summit after six weeks in office, said he expected agreement on emergency steps to help euro zone countries whose cost of credit has reached unsustainable levels.
"I have come here to get very rapid solutions to support countries that in the greatest difficulty on the markets even though they have made considerable efforts to restore their public finances," he told reporters.
Three EU sources said work was focused on activating the euro zone's existing temporary EFSF rescue fund and a future permanent ESM bailout fund to buy Spanish and Italian bonds as they are issued to underpin their bond auctions.
The sources said an agreement could be clinched at a meeting of the 17 euro zone leaders tomorrow after the regular 27-nation EU summit ends.
"We've got to look at existing instruments, and both the EFSF and the ESM, once it is active, have the capacity to buy bonds in the primary market. That's the area that makes sense to operate on," one official said.
Spain and Italy are pleading for emergency action to bring down their spiralling borrowing costs before they are forced out of the bond market. They want the euro zone's rescue funds or the European Central Bank to intervene fast.
A senior German government source, briefing reporters in Berlin before the summit, played down the leap in Spanish and Italian borrowing costs. "We would warn against exaggerated panic-making," he said.
European Council president Herman Van Rompuy and European Commission president Jose Manuel Barroso have set long-term goals of creating a euro zone treasury to issue joint bonds in the medium-term, and establishing a banking union with central supervision, a joint deposit guarantee and a resolution fund.
The Brussels meeting is the 20th summit of leaders of the 27 EU states since the crisis erupted in early 2010, giving them a reputation for failing to match their talk with the sort of decisive action needed to resolve it.
Many international investors have deserted Spanish and Italian debt, pushing yields to levels that Madrid at least cannot afford for long as it tries to save banks ravaged by a property market collapse and rein in an overshooting deficit.
German chancellor Angela Merkel has previously dismissed pleas from Rome and Madrid for rapid measures to support their bonds.
Mr Hollande advocates joint "eurobonds", which would bring down borrowing costs for the weak because the pool of guarantors would include the strongest - principally Germany.
Germany, by contrast, does not want to use its credit rating to support others unless they share control of tax and spending powers first.
Reuters
