Italy and Spain in firing line as euro's fate hangs in the balance

Eurozone leaders braced for battering from financial markets amid fears for future of single currency

  • The Observer,
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    Glum-looking Italian finance minister Giulio Tremonti rests head on elbows
    Italy and Spain face further attacks from anxious investors amid fears for the future of the euro. Above, Giulio Tremonti, the finance minister who announced Italy's latest austerity package on 15 July. Photograph: Filippo Monteforte/AFP/Getty Images
     
    Eurozone leaders are braced for another battering from financial markets this week, amid growing fears that the spiralling sovereign debt crisis is threatening the future of the single currency.

    "It's likely to be a very confused and volatile week, with mixed messages from markets and policymakers," said Sony Kapoor, director of the Brussels-based thinktank Re-Define.

    After Italy was forced to bring forward austerity plans last week to placate anxious bond investors, European council president Herman Van Rompuy called leaders to an emergency summit this Thursday.

    The results of "stress tests" by the new European Banking Authority revealed on Friday that eight banks were vulnerable, and must raise €2.5bn (£2.2bn) to cushion themselves against potential losses.

    The EBA did not calculate the impact of a default by Greece or other vulnerable eurozone countries, but it released detailed data about banks' holdings that will allow analysts to make their own assessment. "Everybody's sitting up crunching numbers," said one market insider.

    Matt Spick, banking analyst at Deutsche Bank, said: "We expect the sector to still be at the mercy of macro issues."

    Unless Thursday's summit results in concrete announcements about how to contain the crisis, analysts are warning that anxious investors will continue to target Italy and Spain.

    Neil Mellor, of BNY Mellon, said: "Everyone expects some sort of default to come about but in the meantime contagion is rife."
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