Merkel rejects Greek default amid euro panic


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Confidence in the future of the eurozone took a yet another knock yesterday as Italian borrowing costs hit a record high and the German Chancellor, Angela Merkel, was forced to quash rumours that Greece was about to crash out of the single currency.

Despite speculation that a Chinese sovereign wealth fund is planning to invest in Italian sovereign debt, the interest rate on a new €3.85bn (£3.33bn) issue of five-year bonds by Rome hit 5.6 per cent yesterday. This is the highest interest rate Italy has had to pay since the single currency was created in 1999, and is a sign of how doubtful investors remain about the soundness of Italian credit.

In response to market speculation that Greece could be on the verge of announcing a default on its borrowings, Ms Merkel told a German radio station: "We are using all the tools we have to prevent this. We need to avoid all disorderly processes with regards to the euro."

She emphasised that a Greek default would result in "domino effects" that would inflict potentially catastrophic damage on the rest of the eurozone. The Chancellor also attempted to indicate that Greece was finally getting its public finances back on track. "Everything I hear from Greece is that the Greek government has hopefully seen the writing on the wall and is now doing some of the things that are required," she added.

Debt investors were not convinced. Interest rates on Greek debt rose to 24 per cent, and fears about the future of the single currency continue to multiply. Sergio Marchionne, the chief exeuctive of Fiat, when asked about the euro's survival at the Frankfurt motor show, said: "I think there is a possibility, if the wrong steps are taken, that the system goes off the rails."

The shares of French banks, which are heavily exposed to sovereign Greek bonds, were ravaged on Monday but recovered somewhat yesterday after two of the largest, BNP Paribas and Société Générale, denied experiencing funding difficulties. The Cac 40 index finished up 1.4 per cent at 2894.93, with SocGen up 14.96 per cent.

Concern about the eurozone crisis continues to grow in the US. Yesterday, President Barack Obama urged European leaders "to take a decision on how to co-ordinate monetary integration".

The US Treasury Secretary, Tim Geithner, will attend a meeting of EU finance ministers in Poland on Friday.