Spanish and Italian pain heaps pressure on crisis 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 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.

Italian prime minister Mario Monti and his Spanish counterpart, Mariano Rajoy, have urged the eurozone to take urgent action to cut their countries' borrowing costs, including by issuing joint guarantees for debt and using the bailout funds to buy up their 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.

In a further sign of concern in financial markets, the key, three-month eurobor bank-to-bank lending rate crept up to 0.653 per cent.

Banks also took over €5bn (£4bn) from the European Central Bank's overnight emergency lending window on Wednesday, the highest level since Greece's debt restructuring in March.

Meanwhile, the euro sank to a three-week low against the dollar at $1.2425.