Euro crisis: Barroso warns debt crisis is spreading

European Commission President Jose Manuel Barroso Mr Barroso said the debt markets' treatment of Spain and Greece was "a cause of deep concern"

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European Commission President Jose Manuel Barroso has warned that the sovereign debt crisis is spreading beyond the periphery of the eurozone.

In a letter to European governments, he called on them to give their "full backing" to the euro currency zone.

He also said governments should rapidly re-assess the European Financial Stability Fund (EFSF) to reduce the risk of contagion in the eurozone.

His comments further rattled the markets, which closed sharply lower.

The main London and Frankfurt indexes closed 3.4% lower, while the Cac 40 in Paris ended down 3.9%. In the US, the Dow Jones index was down 3%.

It is also being reported that the European Central Bank has been buying bonds.

Sources quoted by Reuters said that the bonds being bought were those issued by Portugal and the Irish Republic - crisis-hit countries who have found it more expensive to borrow on the open markets - and that the ECB had no plans to buy any other bonds.

In his regular press conference after the European Central Bank's interest rate meeting, Jean-Claude Trichet would say only that bond buying was "an ongoing programme".

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Italy is in a stronger position than many, but like Spain, Greece, Portugal and others, it has joined the list of eurozone countries that need Europe's leaders to work out what it would take to convince investors of their commitment to the single currency - and then do it. ”

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'Deep concern'

In response to the latest Greek crisis, the eurozone countries agreed changes to the EFSF on 21 July, which would widen its scope and allow it to intervene on the markets.

The changes have not yet been ratified by individual member states.

The EFSF was set up to try to maintain stability in the eurozone by lending up to 440bn euros to its member states.

A spokesman for the German finance ministry said European countries should focus on ratifying the existing agreements rather than changing them.

"It is not clear how reopening the debate only two weeks after the summit would contribute to the calming of markets," he said.

Mr Barroso said that they needed to, "accelerate the approval procedures for the implementation of these decisions so as to make the EFSF enhancements operational very soon".

He described the bond markets' treatment of Italy and Spain as "a cause of deep concern".

'Complexity and incompleteness'

Analysis

Greece, Ireland and Portugal are one thing, but as President Barroso has said in his letter, the crisis is now moving from the periphery of the eurozone.

Spain and Italy are of a different size and importance altogether; things are getting very serious and very close to home.

The eurozone has tried to draw lines in the sand before now, the latest one only two weeks ago, and they have all failed to stop the markets.

Not enough money, few details, a lack of urgency and coordination have all failed to reassure.

The eurozone desperately needs to do something to change that soon and a scheme that lasts longer than a fortnight would be a nice start.

So far, Greece, Portugal and the Irish Republic - known as the eurozone's periphery countries - have needed bailouts. The European Commission is concerned that it might not be able to afford to rescue Italy and Spain, which have the eurozone's third and fourth largest economies.

Mr Barroso said: "Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis.

"Markets highlight, among other reasons, the global economic uncertainties due to both economic growth and the protracted decision on budgetary adjustments in the US but, first and foremost, the undisciplined communication and the complexity and incompleteness of the 21 July package."

Despite the package agreed for Greece on 21 July, bond yields for Spain and Italy have been increasing, hitting euro-era highs this week.

Spain held a bond auction on Thursday and found that the amount it was having to pay to borrow money had increased considerably.

It also said later it had suspended a bond auction due for 18 August.

The activity on the bond markets appears to have prompted the fresh urgency from Mr Barroso, but analysts are not convinced that governments will be able to comply with his wishes.

Market Data

Last Updated at 06:25 ET

Market index Current value Trend Variation % variation
Dow Jones 16408.54 Down -16.31 -0.10%
Nasdaq 4095.52 Up 9.29 0.23%
S&P 500 1864.85 Up 2.54 0.14%
FTSE 100 6625.25 Up 41.08 0.62%
Dax 9409.71 Up 91.89 0.99%
BBC Global 30 6943.56 Down -0.02 -0.03%

"The problem is that the changes that need to be implemented have to be agreed on by national parliaments and everyone's on holiday because it's August," said Peter Westaway, chief economist at Nomura.

"So there's no realistic prospect of it all being ticked up until September at the very earliest and so there needs to be more of an indication of what might be done."

Five-point plan

In Italy, Prime Minister Silvio Berlusconi has been continuing his attempts to calm the markets, which began with a speech on the economy to parliament on Wednesday.

Mr Berlusconi has now met union leaders and employers' representatives, and pledged a number of measures to try to increase confidence in the Italian economy.

These included a constitutional provision to enforce a balanced budget and promises to liberalise the economy and a privatisation programme.

Asked by reporters if more immediate measures would be needed, Mr Berlusconi said: "I don't think the crisis will get worse."

One of the union leaders at the meeting indicated she did not sense the necessary urgency.

"I did not see a climate of emergency on the part of the government," said Susanna Camusso, the leader of the CGIL union.

But Economic Development Minister Paolo Romani said the holiday month of August would become "a working August".

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