EU urges changes to bailout fund

[August 04, 2011]  BRUSSELS (AP) -- The president of the European Union's executive is calling on eurozone leaders to consider further changes to the region's bailout fund, including increasing its size.

In a letter to leaders, European Commission President Jose Manuel Barroso urged "a rapid re-assessment of all elements related to" the eurozone's bailout fund to make sure it can effectively stop the debt crisis from spreading to big countries like Italy and Spain.

Barroso also said countries have to speed up the implementation of recently agreed changes to the fund, which give it pre-emptive tools such as the ability to buy up distressed government bonds.

Many analysts have criticized the leaders' reluctance to boost the size of the euro440 billion ($629 billion) fund, saying that it's not big enough to use the new tools successfully.

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AP's earlier story is below.

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ROME (AP) -- The bond market pressures on Italy and Spain eased somewhat Thursday following a tough few days, which have stoked fears that the eurozone's third and fourth largest economies were getting dangerously embroiled in Europe's debt crisis mire.

Those concerns prompted Italian Prime Minister Silvio Berlusconi to insist that the country's economic foundations and his government were solid. A day after his remarks, the yield on Italy's ten-year bonds were steady below 6 percent, but Milan's main stock market fell a further 0.5 percent.

The pressures on Spain, another country whose financial stability is under scrutiny, have also moderated. Its ten-year yield was down 0.16 percentage point to 6.06 percent while Madrid's main market rose 1 percent.

Spain was forced to pay sharply higher interest rates in a pair of bond auctions, reflecting heightened investor fears over the country's ability to handle its debts and avoid a bailout.

The Spanish Treasury says it sold euro2.2 billion ($3.2 billion) in three-year notes carrying interest rates of 4.81 percent, and euro1.1 billion of three-and-a-half year notes with a rate of 4.98 percent. At the last comparable bond auction on July 7, three-year bonds had an interest rate of 4.3 percent.

The higher rates on offer kept investors interested though and demand for Thursday's offerings was more than twice supply.

In Italy, Berlusconi was meeting unions and business in Rome to map out a strategy for reforms. On Wednesday he told Parliament that he intends to complete his five-year term, which runs until 2013, and step up reforms to spur growth. He called for a cross-party effort to avert a Greek-style financial crisis.

Berlusconi's speech had been eagerly awaited, and was delayed after financial markets had closed for the day.

However, some observers criticized it as too vague.

"Too much perfunctory optimism, too many generic references to reforms," wrote Italy's financial daily Il Sole 24 Ore. It said the reforms are "always evoked, never carried out."

Berlusconi said investors who were pushing up Italy's borrowing rates did not recognize the country's fundamental strengths. He noted the country's stable banking system, low levels of private sector indebtedness -- half that of the United States and Britain -- and a strong entrepreneurial spirit.

However, he said "there is more to do."

Last month, Italy passed a euro70 billion ($99 billion) austerity package that aims to balance the budget by 2014. But the measures have failed to calm market fears over the solidity of the eurozone's third largest economy.

Berlusconi's leadership has been weakened by scandals and legal woes since he won a solid victory in 2008 elections. Reported disagreement between him and Finance Minister Giulio Tremonti, who has devised the austerity package, has added to recent concerns over the government's stability.

The opposition has called for Berlusconi's resignation.

[Associated Press]

Alan Clendenning in Madrid contributed to this story.

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