EU entering 'critical period' to resolve debt crisis

EU Monetary Affairs Commissioner Olli Rehn Olli Rehn said the EU needed to reinforce economic governance

Eurozone leaders have warned that the bloc is entering a decisive phase in its bid to resolve the debt crisis.

Italy's Prime Minister Mario Monti said there would be no room for error at next week's European Union summit and that financial markets would punish inaction.

EU Monetary Affairs Commissioner Olli Rehn said the eurozone was entering a "critical period of 10 days".

Finance ministers met in Brussels on Wednesday for more talks on the crisis.

After the meeting, Mr Monti told a news conference that markets would "sanction" further delays in sorting out the debt woes and restoring confidence.

"We know that what will be decided or not decided will be sanctioned by the markets on the 10th" of December - the day after the two-day summit ends, he said.

Earlier, Mr Rehn said the region had just days to take decisive action.

"We are now entering the critical period of 10 days to complete and conclude the crisis response," he said.

And European Council President Herman Van Rompuy also warned of the growing seriousness of the crisis.

"The trouble has become systemic. We are witnessing a full-blown confidence crisis," he said in the run-up to the finance ministers' meeting.

"Some may blame it on the irrationality of the market, but it's a fact and we need to confront it."

Wednesday's meeting came a day after eurozone ministers agreed measures to expand the region's bailout fund.

But they said it was unlikely to hit its 1tn euro ($1.3tn; £860bn) target.

Meanwhile, the latest figures from the European Central Bank (ECB) show that eurozone banks are becoming increasingly nervous about lending to each other.

George Osborne MP: "It's time for the eurozone to face up to its problems"

Banks deposited 300bn euros with the ECB on Tuesday night, a rise of 100bn euros over the past two weeks.

The increase "shows that parts of the eurozone are close to a credit crunch, if not already in one," said the BBC's business editor Robert Peston.

Higher rates

Eurogroup chief Jean-Claude Juncker said the expansion of the bailout fund, known as the European Financial Stability Facility (EFSF), would still be "substantial".

European leaders want to bolster the EFSF, which currently has a lending capacity of 440bn euros, in case large economies such as Italy or Spain need to call for bailout money.

Fears that Italy in particular may need financial assistance were raised on Tuesday when the government was forced to pay much higher interest rates in a bond auction.

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Finance ministers need to find extra money from somewhere, because Italy's financing requirements just next year could exhaust almost half of the EFSF's promised extra firepower”

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Ministers did agree to allow the bailout fund to partially guarantee potential losses investors might incur on the purchase of government bonds.

In a statement, the EFSF said the guarantee would give a bondholder "an amount of fixed credit protection of 20% to 30% of the principal amount of the sovereign bond".

Ministers also decided to create co-investment funds to allow public and private investors to participate in the EFSF. But fund chief Karl Regling said it was impossible to give a figure at this stage.

Ministers also agreed to release the latest 8bn euro tranche of bailout money to Greece.

Earlier this week, France and Germany proposed closer ties between eurozone economies, including binding limits on borrowing.

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