Reuters, By James Mackenzie and Gareth Jones
ROME/ATHENS The euro zone looks for some respite on Wednesday, with Italy due to unveil a technocrat-led cabinet and a new Greek coalition expected to win a confidence vote, as Europe battles to prevent its debt woes from dragging down the world economy. Former EU commissioner Mario Monti is set to inform Italy’s president that he has assembled a new government, whose most pressing task will be to get a fractious political class to agree to painful structural reforms designed to rescue its debt-laden finances. In Athens, new prime minister Lucas Papademos expects an easy win in a confidence vote, but rebuilding Greece’s shattered finances will be a daunting task with his national unity government already split over new austerity measures. With financial markets sceptical that unelected technocrats will have the political clout to impose unpopular reforms, the two-year debt crisis risks engulfing the entire currency bloc and hurting global growth. Asian shares and the euro fell on Wednesday as signs that rising borrowing costs were affecting AAA-rated France stirred fears that even core euro zone members may not escape contagion from the region’s debt crisis. MSCI’s broadest index of Asia Pacific shares outside Japan fell 1.3 percent, while Japan’s Nikkei stock average slipped 0.1 percent on Wednesday.
The euro hit a five-week low and was down 0.6 percent against both the dollar and the yen, standing at US$1.3453 and 103.66 yen respectively, as euro zone jitters spurred risk aversion moves. “Markets are clearly expecting a circuit breaker to alleviate pressure on periphery bond yields,” said David Scutt, a trader at Arab Bank Australia in Sydney. “If no announcement is forthcoming in the days ahead, one suspects that situation could unravel fairly quickly.” U.S. Treasury Secretary Timothy Geithner said Europe had a difficult task in boosting the creditworthiness of some of its economies while also boosting growth. “That’s a difficult balance and you can see they’re struggling with it but I think they’re gradually making progress,” he told a conference sponsored by the Wall Street Journal. “This is absolutely within Europe’s capacity to solve and it’s within their ability.” France has become the latest euro zone member to come under pressure after a spike in its borrowing costs on jittery bond markets fuelled concerns that the euro zone’s second biggest economy was also being sucked into the spiralling debt crisis. With a Brussels-based think-tank warning that Paris’s economy should be “ringing alarm bells”, Finance Minister Francois Baroin sought to calm fears about France’s finances. “We have the necessary room to manoeuvre within the budget to meet our 2012 deficit target even if the economy slows more than expected,” he said in an interview in Wednesday’s edition of Les Echos. “Even with growth of 0.5 percent we can cope.” Baroin said the government was not working on a third savings package after announcing a second round of belt-tightening in three months last week in order to keep its deficit targets within reach, despite slowing growth. Data on Tuesday showed the economy of the 17-nation euro zone barely grew in the third quarter. ECB President Mario Draghi has predicted the currency bloc will be in a mild recession by the end of the year.
Against that backdrop, Italian prime minister-designate Monti is to unveil his cabinet line-up after a meeting with President Giorgio Napolitano scheduled for around 1000 GMT. His cabinet, expected to feature experts, academics and some politicians, will have the job of speeding up reform of pensions, labour markets and business regulation in order to put Italy’s finances on a sustainable path. Yields on Italy’s 10-year BTP bonds climbed to over 7 percent on Tuesday, the level at which Greece and Ireland were forced into bailouts. Italy must refinance some 200 billion euros (US$273 billion) of bonds by the end of April.