(Updates to close European stocks in seventh paragraph. For more news on the debt crisis, see EXT4 <GO>.)
Nov. 18 (Bloomberg) -- Europe is running out of options to fix its debt crisis and it is now up to Italy and Greece to convince markets they can deliver the necessary austerity measures, Finnish Prime Minister Jyrki Katainen said.
“The European Union cannot restore confidence in Greece and Italy if they don’t do it themselves,” Katainen said in an interview in Helsinki yesterday. “We can’t do anything to boost confidence in them. If there are doubts about these countries’ abilities to take sensible and correct decisions on economic policy, no one else can repair that.”
Crisis management efforts have done little to stem the turmoil as Italy, the third-largest euro-area economy, struggles to persuade investors it can stay afloat without a bailout. Europe’s Oct. 26 deal, which boosted the region’s temporary rescue fund to 1 trillion euros ($1.4 trillion), has “failed to calm markets,” Katainen said.
Since last month’s agreement, the euro has lost 2.3 percent against the dollar and borrowing costs on two-year Italian government debt have jumped 135 basis points. The cost of insuring against a default on five-year Italian debt using credit default swaps has jumped 23 percent in the period.
Pledging more European support isn’t the issue as “nothing else can have as strong an impact as a concrete, transparent and timed program of measures that is implemented” by Greece and Italy, Katainen said.
No Crisis Fix
Prime Minister Mario Monti said yesterday Italy’s actions will affect the future of the euro, as he pledged additional cuts to those targeted by Silvio Berlusconi. In Greece, the International Monetary Fund said yesterday it won’t release the next portion of its loan until Prime Minister Lucas Papademos wins broad political support for austerity measures.
European stocks declined, with the benchmark Stoxx Europe 600 Index closing 0.6 percent lower at 232.49. The gauge has retreated 3.5 percent this week as Italian and Spanish borrowing costs surged and Germany rejected a French call to squeeze more support out of the European Central Bank.
Mapping out the possibility of euro exits “should be discussed when the rules are revamped,” Katainen said. “It’s no medicine to fix this crisis.”
Finland and other AAA rated euro nations are becoming more outspoken in their opposition to expanding rescue measures for Europe’s most indebted members. German Chancellor Angela Merkel yesterday rejected French calls to force the ECB to become a lender of last resort. Germany and Finland both oppose common euro bonds as a solution to the crisis.
The ECB bought Italian government bonds today, said three people with knowledge of the trades, who declined to be identified because the transactions are private. It also bought Spanish government securities, two people said. A spokesman for the ECB in Frankfurt declined to comment today on asset purchases.
The spread between yields on Italy’s two-year debt and similar-maturity German bunds narrowed to 552 basis points today from this week’s high of 610 basis points Nov. 15. One basis point is 0.01 percentage point.
ECB President Mario Draghi said in Frankfurt today the bank should remain focused on price stability and pressed governments to act on promises to end the sovereign debt crisis, indicating he’s not prepared to come to the rescue with large-scale bond purchases.
EU treaties could be re-opened to toughen rules on budgets and the economy, Katainen said in an interview with French newspaper La Tribune, repeating comments made Nov. 7 that sought a “more realistic, not idealistic” treaty to guide the bloc.
Even top-rated countries like Finland need to step up efforts to keep their budgets in check, Katainen said. Finland must continue to outperform its AAA rated peers to retain its top rating, Standard & Poor’s said on Nov. 9.
“Finland can’t lull itself into thinking all is always well here. We must defend our credibility and the stability of our economy,” Katainen said. “The best guarantee for low yields is to keep our economy in good shape.”
--Editors: Tasneem Brogger, Jonas Bergman
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