Spanish and Italian woes raise heat at EU summit

Spain's borrowing costs jumped above 7 per cent and Italy had to pay through the nose to raise debt at an auction yesterday, heaping more pressure on European leaders as they kicked off a eurozone crisis summit in Brussels.

Madrid's 10-year bond yields shot up in early trading, before falling back slightly to 6.94 per cent.

Meanwhile, Rome had to pay 6.19 per cent to offload new, 10-year bonds and 5.84 per cent to sell five-year bonds, the highest interest rates since last December.

A European Commission survey showed economic confidence in the eurozone falling to a 32-month low in June. And the Italian employers group, Confindustria, warned that the Italian economy is in an "abyss" and it expected a contraction of 2.4 per cent over the year, up from a previous estimate of a 1.6 per cent fall.

The Italian Prime Minister Mario Monti and his Spanish counterpart, Mariano Rajoy, have urged the eurozone to take urgent action to cut its countries' borrowing costs, including by issuing joint guarantees for debt and using the bailout funds to buy up its bonds. But the German Chancellor, Angela Merkel, said on Tuesday that eurobonds would not happen in her lifetime. And German government sources warned the Brussels summit, where leaders are discussing plans for a pan-European banking union and closer fiscal integration between member states, is unlikely to deliver any detailed decision.

Analysts said a weak summit conclusion could cause chaos. "If Mr Monti is not able to extract some concessions from Germany to help shore up Italian debt, this will be received very badly by investors and Italy could be heading for early elections later this year," said Nicholas Spiro of Spiro Sovereign Strategy. Meanwhile, the euro sank to a three-week low against the dollar at $1.2425.

Banks took more than €5bn (£4bn) from the European Central Bank's overnight emergency lending window, the highest level since March