Debt crisis spreads despite Spanish election result

THE EURO zone’s debt crisis swept closer to the heart of Europe yesterday despite a clear-cut election victory in Spain for conservatives committed to austerity, adding to pressure on the European Central Bank to act more decisively.

Austrian bank supervisors instructed the country’s banks to limit future lending in their east European subsidiaries, another sign of the potential knock-on effects of the euro zone crisis for economies around the world.

The restrictions come as Austrian officials seek to defend the country’s AAA credit rating amid concerns that the government may have to bail out its banks because of losses in central and eastern Europe, where they are the biggest lenders, and their exposure to Italy.

The decision by Austria, which appears to be unilateral, shows how even the euro zone’s strongest economies are feeling the pressure of the sovereign debt crisis.

Neighbouring Hungary yesterday officially requested precautionary financial help from the International Monetary Fund and European Union, confirming a U-turn after Budapest shunned more IMF support 18 months ago.

In Spain, the Socialists became the fifth government in the 17-nation currency area to be toppled by the sovereign debt crisis this year. Portugal, Ireland, Italy and Greece went before, while Slovakia’s cabinet lost a confidence vote last month and faces a general election in March.

An absolute parliamentary majority for Mariano Rajoy’s centre-right Popular Party brought no respite to financial markets increasingly alarmed by the absence of an effective firewall to halt a meltdown on sovereign bond markets.

The risk premiums on Spanish, Italian, French and Belgian government bonds rose as investors fled to safe-haven German Bunds, while European shares fell more than 3 per cent after Moody’s warned that France’s credit rating faced new dangers. “This crisis is hitting the core of the euro zone. We should have no illusions about this,” EU economic and monetary affairs commissioner Olli Rehn said.

He defended the EU executive’s advocacy of austerity policies blamed for choking off growth and jobs.

Borrowing costs for both Spain and Italy hit levels regarded as unsustainable last week before the ECB stepped in temporarily to steady the market.

Two newspapers said the ECB’s governing council had imposed a weekly limit of €20 billion on purchases of euro zone government bonds, a figure analysts say prevents it wielding massive deterrent power in the markets. Germany’s central bank has led resistance to the bond-buying it sees as inflationary.

The latest weekly figures released yesterday showed the central bank bought nearly €8 billion in the week to last Wednesday, far below that reported limit in a week when Italian and French spreads hit euro-era highs.

Critics say this reluctant, piecemeal approach is aggravating the situation rather than restoring confidence.

ECB governing council member Ewald Nowotny told a conference in Vienna that the central bank could not simply start printing money but would have to discuss its next response to the crisis.

“What we certainly have to discuss is what is a role for the ECB in these difficult times, but this is also something we will discuss in Frankfurt at the appropriate time,” he said.

Ratings agency Moody’s said a recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for France’s credit rating.

France’s government spokeswoman insisted yesterday that Paris would not impose a third package of budget savings, despite market pressure on its cost of credit. – (Reuters/The Finanicial Times Limited 2011)