The Euro fights for its life as debt crisis bites in Italy

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The Independent Online

European finance ministers are preparing for a crisis meeting as early as tomorrow as the latest wave of investor panic threatens the very existence the European single currency.

So-called stress tests on European banks, to be published this week, are likely to reveal serious weaknesses in the ability of the banks to withstand any further financial shocks – while many of their parent governments are in a scarcely stronger position to weather a storm or rescue them again.

Rumours about the feeble situation of the Italian banks – which hold vast quantities of Italian government bonds and may need to be rescued by the Italian state – recently triggered a sell-off of Rome's government debt.

In America, the chair of the Federal Reserve, Ben Bernanke, hinted that he might launch a so-called "QE3" third round quantitative easing: a further massive direct injection of money into the American economy on top of the $1trn already expended to rescue its faltering recovery.

Gold surged to a new high of more than $1,580 (£981) an ounce. At the same time, the Greek Prime Minister, George Papandreou tried to force the pace on a second, €100bn, bailout of his country: "The current mood doesn't help us to get through this crisis. This uncertainty scares investors. If we don't get a decision soon supporting the second Greek programme so that the country can begin its far-reaching reforms, the programme itself could be held up."

The IMF countered that Greece itself must move faster on fiscal and structural reforms to avoid default, and urged eurozone countries to speed up a decision on how to support their troubled partner.

Italian government bonds, the subject of another stampede for the door by investors, were faring slightly better yesterday, but the "contagion" so feared by European leaders and which threatens the future of the single currency itself shows few signs of permanently abating. A downgrade of Irish debt to "junk" status by a credit ratings agency on Tuesday also did little to boost confidence. A week ago the ratings firm slashed Portugal's rating to junk with a similar warning. And while a second round of bailouts to small nations would be manageable for the €440bn European fund, a collapse in Italy or Spain would stretch its resources beyond breaking point.

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