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Italy and Greece worries shake euro zone

Sep 6, 2011, 4:47 a.m.
A maintenance worker talks on the phone at Madrid's bourse as computer screens are reflected on a glass tabletop, September 6, 2011. REUTERS/ Susana Vera

By Noah Barkin

BERLIN (Reuters) - The euro zone's debt crisis appeared at risk of spiraling out of control on Tuesday amid doubts about Italy and Greece's willingness to push through austerity demanded by their partners, and hardening opposition to further aid in paymaster Germany.

Against a backdrop of nationwide strikes, the government of embattled Italian Prime Minister Silvio Berlusconi scrambled to secure parliamentary backing for a package of reforms that has hammered Rome's credibility in financial markets because of the chaotic way it has been handled.

Meanwhile fiscal backsliding in Greece has put a new aid payment from the country's international lenders at risk and prompted some lawmakers in German Chancellor Angela Merkel's party to press her on why Athens is not simply booted out of the 17-nation currency bloc.

Just six weeks after euro zone leaders came together in Brussels to agree new anti-crisis measures, their strategy looks to be unraveling, with resistance to austerity in Europe's southern periphery rising just as resentment in core countries like Germany builds to a crescendo.

"Once you say to Italy we will not allow you to fail, they then have the upper hand," said David Mackie, an economist at J.P. Morgan in London. "There has been a moral hazard issue with Greece for some time. Now we have one in Italy too."

The euro tumbled to a six-month low against the yen and a seven-week low against the dollar in early trade on Tuesday as market concerns about the crisis grew.

Italian bonds edged higher a day after a sharp sell-off, with traders citing intervention by the European Central Bank (ECB). On Monday, incoming ECB President Mario Draghi said the bank could not be counted on to buy up the bonds of weak euro zone members indefinitely, in what was widely seen as a warning to his native Italy.

ECB WARNING

The ECB agreed last month to buy up Italian and Spanish debt on the open market to prevent an upward spiral in their borrowing costs that threatened to tear Europe's 12-year old single currency apart.

But it did so only after receiving new reform pledges from Rome that Berlusconi's government, under pressure from unions, has since tinkered with.

The ECB is also counting on European governments to step in and assume the role of bond-buyer of last resort once their rescue mechanism, the European Financial Stability Facility (EFSF), receives new powers.

For that to happen, national parliaments need to approve the changes to the mechanism -- a significant hurdle in member states where aid to euro zone stragglers is increasingly unpopular.

Slovakia is refusing to hold a vote until all other euro zone members have backed the changes. In Germany, Merkel's own position is at risk if enough of her conservative allies rebel in a Bundestag vote scheduled for September 29.

In preliminary internal party votes late on Monday, 25 lawmakers from Germany's ruling coalition refused to back more powers for the EFSF, raising questions about whether Merkel can deliver a parliamentary majority without help from the opposition.

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