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Europe lacks firewall in debt crisis

FRANKFURT, Germany (AP) — The European Central Bank is for now the eurozone’s only battle-ready weapon against the market turmoil that is nudging Italy — and the entire 17-nation currency bloc — to the brink of financial disaster.

But although its program to buy the bonds of indebted governments such as Italy theoretically has unlimited financial power, the ECB is unwilling to use it aggressively, saying it’s up to governments to get their finances straightened out.

Defining the ECB’s role in the crisis has become urgent because Europe has no other effective backstop to contain its raging debt crisis and give indebted countries the months — and years — they need to pass new legislation and fix their finances.

The eurozone bailout fund, which governments recently gave new powers to shore up confidence in government bond markets, was meant to be the main tool to protect economies like Italy. But European officials need more time to finalize it.

The crisis meanwhile is worsening by the day, with Italy’s bond yields this week jumping above 7 percent, the level that eventually pushed Greece, Ireland and Portugal to ask for rescue loans.

Higher borrowing rates mean the country pays more to raise money to pay off old loans — last year its average borrowing rate was 4 percent. The higher costs add to its debt pile, worsening its financial prospects in a vicious cycle.

European officials need a way to keep Italy’s borrowing rates down while the country labors to pass reforms to cut deficits and improve growth, a job that will take time.

Options are limited. Their new eurozone bailout fund, the EFSF, isn’t ready yet and may not have enough lending power. Eurozone governments have balked at adding more money, so they are looking at ways to increase the existing euro440 billion ($600 billion) in financing to over euro1 trillion by allowing it to partially insure against losses on government bonds.

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Source:  AP

Category: World News |

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Last updated December 2, 2016 at 1:59 PM
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