Europe puts squeeze on Italy and Greece

Europe has turned up the heat on Italy and Greece to fix their finances, as finance ministers scrambled to conjure up a firewall big enough to stop the debt crisis from infecting more countries.

As euro ministers gathered at EU headquarters on Monday to address the festering crisis, France moved to protect its gold-plated credit rating from the contagion dragging down Rome by announcing big pre-election spending cuts and tax hikes.

But while Rome andAthens were told to commit to reduce debts in order to ease currency partners’ growing concerns, the ministers themselves came under mounting pressure to find a way to deliver a rescue fund boost decided by EU leaders.

As worried non-euro ministers were to gather simultaneously in a Brussels hotel, the EU piled pressure on Italy to make good on its vows to slash its 1.9 trillion euro ($A2.5 trillion) debt pile – with borrowing costs for Rome hitting the sort of levels that triggered bailouts for Greece, Ireland and Portugal.

European Union Economic Affairs Commissioner Olli Rehn said it was “essential” that Italy sticks to stated fiscal targets, ensures their implementation and intensifies structural reforms designed to deliver growth.

Rehn said officials from the Commission would be in Rome this week working alongside International Monetary Fund auditors invited in by Italy during last week’s G20 summit.

German Finance Minister Wolfgang Schaeuble, whose government pays the lion’s share of eurozone bailout costs, insisted Italy was no Greece, even as the yield on Italian 10-year debt bonds rose to a record 6.596 per cent in morning trading.

“The data on the real economy in Italy do not justify this nervousness,” Schaeuble said.

Italian share prices rallied on rumours that Prime Minister Silvio Berlusconi would resign, but global markets turned lower.

The eurozone debt crisis has been in a deepening spiral since August, when Italy first came under intense pressure on bond markets and the IMF blocked the release of 8 billion euros ($A10.66 billion) for Greece from a first bailout last year as it wasn’t meeting targets.

Once again, with a new Greek coalition government being formed after Prime Minister George Papandreou agreed to step aside, ministers are seeking assurances on Greek promises before unblocking the loans.

The European Commission demanded “clarity” from Athens, while eurozone chief Jean-Claude Juncker said a decision would depend on how ministers view commitments given by Greek Finance Minister Evangelos Venizelos.

Venizelos said that a deal to form a national unity government in Greece was itself sufficient.

“We have a new government of national unity and of national responsibility,” he said. “This is the proof of our commitment and of our national capacity to implement the program and to reconstruct our country.”

Greece needs the money from last year’s 110 billion euros ($A146.63 billion) bailout by mid-December to stay afloat.

The initial target for coming up with details on how to beef up the European Financial Stability Facility (EFSF) was a planned meeting of EU finance ministers on November 30.

However, with Spain also under pressure, EU diplomats said a fresh meeting of eurozone finance ministers may need to be held on November 17.

Officials are working on “leveraging” up the EFSF’s capacity, but a diplomatic source said the 1 trillion euros ($A1.33 trillion) target was proving difficult to reach, after failing to win support from international partners at G20 talks last week – and in any case was insufficient given the worries over Italy.

The EFSF had to pay a considerably higher effective interest rate of 3.59 per cent to raise funds from investors on Monday, with demand barely exceeding the 3 billion ($A4 billion) on offer.

Papandreou is making way for a national unity government which will then have to ratify a crucial 230 billion euro debt rescue package, agreed by Greece’s euro partners but in limbo due to political drama in Athens.