Monti's warning

And yet markets are up today...

EU's future in danger: Italian PM

Disagreements within the 17-nation euro area are undermining the future of the European Union, said Italy's Prime Minister Mario Monti as the stand-off on European Central Bank (ECB) support for Italian and Spanish debt hardened.

Today,

6 August, 2012

"The tensions that have accompanied the euro zone in the past years are already showing signs of a psychological dissolution of Europe," he told Germany's Spiegel magazine in an interview published yesterday.

"I can only welcome the ECB's statement that there is a 'severe malfunctioning' in the market for government bonds in the euro region. It's also true that some countries have to shoulder 'extraordinarily high' costs to finance their debts. That's exactly what I've been saying for a long time."

Mr Monti urged swift action to lower borrowing rates.

Investors and politicians are still grappling with the significance of comments on sovereign debt purchases by ECB President Mario Draghi last week. While markets initially tumbled last Thursday after Mr Draghi said Spain and Italy would have to formally request a resumption of the bank's bond buying, they rallied the following day as investors concluded that ECB action would occur, albeit on an unknown future date.

Spain's 10-year bond yield rose as high as 7.44 per cent after Mr Draghi's press conference, before ending the week at 6.77 per cent. Yields on Italy's similarly dated bonds rose to 6.28 per cent and ended the week at 6.01 per cent. That compares with 1.42 per cent for 10-year German debt.

Mr Monti said Italy was effectively helping German borrowing costs as the federal government benefited from its neighbours' rates. He told Spiegel: "The high yields Italy has to pay right now subsidise the low ones Germany is paying. Without that risk, the yields on German government bonds would be somewhat higher."

Spain and Italy meanwhile suggested that bailout requests may not be imminent or necessary.