As yet another summit between German chancellor Angela Merkel and French president Nicolas Sarkozy has taken place amid fears of default by Greece and Italy grew. Italian bank Unicredit’s shares slumped in response to the news of a heavily discounted rights issue. Ten-year Italian bond yields remained above the unsustainable 7% threshold. Discussions over the details of the Greek rescue package dragged on. Nervous investors were so keen to snap up safe debt that they paid Germany to lend to it for six months: an auction produced a negative yield of 0.012%.
What the commentators said
“Saving the euro, part 473”, or the “Merkozy summit”, produced little of interest, said Economist.com; “certainly nothing that would betoken a swift and happy conclusion to the long-running saga”. The new treaty to shore up fiscal discipline should be signed in March, while they pledged to accelerate their contributions to the (still too small) European bail-out fund. But most striking, and negative, was that Merkel now says keeping the euro together is ambitious but achievable, noted Capital Economics. Previously, it was apparently unthinkable. “Some form of break-up” is now looking increasingly likely.
Italy could be the trigger for a financial and banking crisis that sinks the single currency. Italian banks are being buffeted by surging withdrawals by retail depositors and “a complete inability to raise funds in the wholesale market”, said FxPro.com. If retail investors keep fleeing from Italian banks – “and frankly why would you risk leaving your deposits there?” – then the situation “will become unsustainable”. The government can’t afford to prop up its banks and the threat of contagion across the financial system would be severe. “Italy… is on the edge.”