European Council President Herman Van Rompuy has called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday morning, reflecting concern that the crisis could spread to Italy, the region's third largest economy.
European Central Bank President Jean-Claude Trichet will attend the meeting along with Jean-Claude Juncker, chairman of the region's finance ministers, European Commission President Jose Manuel Barroso and Olli Rehn, the economic and monetary affairs commissioner, three official sources told Reuters.
Van Rompuy's spokesman Dirk De Backer said: It's a coordination, not a crisis meeting. He added that Italy would not be on the agenda and declined to say what would be discussed.
However, two official sources told Reuters that the situation in Italy would be discussed. The talks were organized after a sharp sell-off in Italian assets on Friday, which has increased fears that Italy, with the highest sovereign debt ratio relative to its economy in the euro zone after Greece, could be next to suffer in the crisis. A second international bailout of Greece will also be discussed, the sources said.
The spread of the Italian 10-year government bond yield over benchmark German Bunds hit euro lifetime highs around 2.45 percentage points on Friday, raising the Italian yield to 5.28 percent, close to the 5.5-5.7 percent area which some bankers think could start putting heavy pressure on Italy's finances.
Shares in Italy's biggest bank, Unicredit Spa, fell 7.9 percent on Friday, partly because of worries about the results of stress tests of the health of European banks that will be released on July 15. The leading Italian stock index sank 3.5 percent.
The market pressure is due partly to Italy's high sovereign debt and sluggish economy, but also to concern that Prime Minister Silvio Berlusconi may be trying to undermine and even push out Finance Minister Giulio Tremonti, who has promoted deep spending cuts to control the budget deficit.
We can't go on for many more days like Friday, a senior ECB official said. We're very worried about Italy.
Monday's emergency meeting will precede a previously scheduled gathering of the euro zone's 17 finance ministers to discuss how to secure a contribution of private sector investors to the second bailout of Greece, as well as the results of the stress tests of 91 European banks.
Greece is already receiving 110 billion euros ($157 billion) of international loans under a rescue scheme launched in May last year but this has failed to change market expectations that it will eventually default on its debt.
Senior euro zone officials worry that progress toward a second Greek bailout, which would also total around 110 billion euros and aim to fund the country into late 2014, is not being made quickly enough and that the delay is poisoning investors' confidence in weak economies around the region.
We need to move on this in the next couple of weeks. It's not a case of waiting until late August or early September as Germany is saying. That's too late and markets will make us pay for it, a top euro zone official told Reuters on Saturday.
German officials insist they too want to put together the second Greek bailout as quickly as possible, but the private sector's contribution is proving to be a major sticking point.
Germany, the Netherlands, Austria and Finland are determined that banks, insurers and other private holders of Greek government bonds should bear some of the costs of helping Athens. But more than two weeks of negotiations with bankers represented by the Institute of International Finance (IIF), a lobby group, have made next to no progress on agreeing a formula acceptable to all sides.
Initially talks focused on a complex French plan for private creditors to roll over up to 30 billion euros of Greek debt, buying new bonds as their existing ones matured. Around half of proceeds from Greek bonds maturing before the end of 2014 would be rolled over into very long-term debt while 20 percent would be put into a guarantee fund of AAA-rated securities.
But as that plan has floundered, Berlin has revived a proposal to swap Greek bonds for longer-dated debt that would extend maturities by seven years. Proposals to buy back Greek bonds and retire them have also been floated.
In a buy-back, the euro zone's bailout fund, the European Financial Stability Facility, might buy Greek bonds from the market, or the EFSF might lend Greece money to buy bonds. However, these schemes would require further changes to the EFSF's rules and would therefore have to go through national parliaments, an official source said.
A senior euro zone official told Reuters on Friday that rather than progress being made in the talks with the IIF, as IIF managing director Charles Dallara has said, all sides were close to being back to square one.
Dallara will attend the meeting of euro zone finance ministers in Brussels on Monday.
Since the euro zone's debt crisis erupted last year, the region's rich governments have aimed to limit it to Greece, Ireland and Portugal, which have so far signed up to bailouts totaling 273 billion euros -- a sum that is small compared to the financial resources of the zone as a whole.
Spain, traditionally seen as the next potential domino in the crisis, has managed to retain its access to market funding through fiscal reforms. But because of the large sizes of the Spanish and Italian economies, pressure on the euro zone would increase dramatically if those countries eventually needed financial assistance.
Private analysts have estimated a three-year bailout of Spain, based on its projected gross issuance of medium- and long-term debt in 2011, might cost some 300 billion euros -- excluding any additional money for cleaning up Spain's banks. A three-year rescue of Italy could cost twice that.
German newspaper Die Welt quoted an unnamed ECB source as saying on Sunday that the EFSF, which has a nominal size of 440 billion euros, was not large enough to protect Italy because it had not been designed to do that.
In Italy on Sunday, politicians and government officials scrambled to present a united front and defend Tremonti. Umberto Bossi, the powerful leader of Berlusconi's Northern League coalition allies, praised Tremonti for listening to the markets.
From tomorrow, we have the job of showing we are united and blocking the effort of speculators, said Paolo Bonaiuti, a government undersecretary and senior aide to Berlusconi.
In the coming months we have 120-130 billion euros of bond issues to deal with, so we need cohesion and united intent; it'll take effort to show that the markets are overdoing it.
However, Berlusconi himself was silent over the weekend and canceled two appointments to speak, and it was not clear how long the appearance of consensus in the government over austerity plans would last.
One factor behind bond markets' growing instability is a sense that the euro zone's basic strategy for dealing with debt problems -- keeping countries afloat with emergency loans in the hope they can grow their way out of their debts within a few years -- is flawed. More radical action to cut the countries' debts or boost economic growth may be needed.
In Germany on Sunday, President Christian Wulff said Greece would need a lot longer to resolve its debt problems than many people in Europe were now acknowledging.
Wulff, a former leader in Chancellor Angela Merkel's conservative Christian Democrats and now Germany's ceremonial head of state, told ZDF television there was a need for an overall concept for resolving Europe's debt crisis.
It can't be something that will suffice for a three-month period but rather has to offer solutions to the problem that will cover the next 10 to 15 years, Wulff said.
(Additional reporting by Francesca Landini in Milan and Gernot Heller in Berlin; Editing by Andrew Torchia)