WRAPUP 1-Debt crisis sweeps towards heart of Europe

Mon Nov 21, 2011 6:45pm EST

Related Topics

* Markets in turmoil despite clear-cut Spanish election outcome

* Spain's People's Party wins absolute parliamentary majority

* EU's Rehn says crisis hitting core of euro zone

* Greece set to get lifesaving cash injection

By Robin Emmott and Fiona Ortiz

BRUSSELS/MADRID, Nov 22 (Reuters) - The euro zone's debt crisis swept closer to the heart of Europe despite a clear-cut election victory in Spain for conservatives committed to austerity, adding to pressure on the European Central Bank to act more decisively.

Spain's Socialists became the fifth government in the 17-nation currency area to be toppled by the sovereign debt crisis this year. Portugal, Ireland, Italy and Greece went before, while Slovakia's cabinet lost a confidence vote last month and faces a general election in March.

An absolute parliamentary majority for Mariano Rajoy's centre-right Popular Party brought no respite on financial markets increasingly alarmed by the absence of an effective firewall to halt a meltdown on sovereign bond markets.

Rajoy kept investors, and Spaniards, guessing about his plans to tackle the crisis, saying the constitution will make him wait until just before Dec. 25 to name an economy minister and explain how he will get five million people back to work.

The risk premiums on Spanish, Italian, French and Belgian government bonds rose as investors fled to safe-haven German Bunds, while European shares fell more than 3 percent after Moody's warned that France's credit rating faced new dangers.

"This crisis is hitting the core of the euro zone. We should have no illusions about this," European Economic and Monetary Affairs Commissioner Olli Rehn said.

He defended the European Union executive's advocacy of austerity policies blamed for choking off growth and jobs.





Two newspapers said the ECB's governing council had imposed a weekly limit of 20 billion euros on purchases of euro zone government bonds, a figure analysts say prevents it wielding massive deterrent power in the markets. Germany's central bank has led resistance to the bond-buying it sees as inflationary.










The chairman of Goldman Sachs Asset Management, Jim O'Neill, said the crisis of European economic and monetary union (EMU) meant "big decisions have to be taken pretty quickly".

"It's not obvious to me that EMU could survive without Italy," he told a Confederation of British Industry conference.

"It's not obvious to me that Italy can survive with 6-7 percent bond yields, so something's going to have give pretty quickly. Italian bond yields have got to come down pretty quickly or EMU will have some severe challenges."

Dutch Finance Minister Jan Kees de Jager, one of Berlin's closest allies, acknowledged that the euro zone could splinter.

Asked whether a break-up of the euro would cause an economic depression, he told BNR radio: "This could be a consequence from the euro zone falling apart, that is correct."

The chief executive of Deutsche Bank, Josef Ackermann, said Greece leaving the Eurozone would cause incalculable damage and make it less likely that Greece would pay its debts.


"We will stop being part of the problem and will be part of the solution," Rajoy said after the vote.

Nicolas Lopez, head of research at M&G Valores, said the government had to introduce convincing measures. "While these measures are being taken, the ECB will have to buy up bonds as it has been doing to maintain confidence," he said.

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