ITALY: Euro zone has no plans to rescue Italy: officials

By Jan Strupczewski and John O'Donnell
BRUSSELS | Wed Nov 9, 2011

(Reuters) - The euro zone has no plans for a financial rescue of Italy, even though borrowing costs of the euro zone's third biggest economy have risen sharply to levels that economists see as unsustainable, euro zone officials said on Wednesday.
"Financial assistance is not in the cards," one euro zone official said, adding the euro zone was not even considering extending a precautionary credit line to Rome.
The euro zone bailout fund, the European Financial Stability Facility (EFSF) will be able to extend such a precautionary credit line to countries which may be cut off from markets, once euro zone finance ministers agree on technical and legal details of the operation by the end of November.
The EFSF will also then be able to buy bonds on the primary and secondary markets, using various insurance schemes that would boost four to five-fold its currently free funds of around 250 billion euros.
Yields of 10-year Italian bonds surged well above seven percent on Wednesday -- a level that many economists see as unsustainable.
Ireland and Portugal in the past were forced to seek euro zone and IMF emergency loans once their borrowing costs rose to such levels.
But the size of the potential bailout for Italy, which needs to repay 326 billion euros in maturing debt only in the next 12 months, is too big to handle for the EFSF.
It would be up to Italy to reassure investors it would pay back what it borrowed, the official said.
"They will just have to prove that the yields are not justified, because they aren't," the official said.
"There is not much, if anything, we can do immediately. It is a matter of confidence which Italy will have to rebuild itself. We can only help from the sidelines," the official said.
A senior euro zone diplomat said euro zone countries were hoping that the European Central Bank would support Italy, as there was no alternative.
"The lines of communication are very much open. But the ECB will not make a statement to this effect (support for Italy)," the second official said. "The ECB will be drawn like every one else by the weight of gravity (to act)."
The ECB aggressively bought Italian bonds on the market on Wednesday focusing on 2-year and 10-year maturities to halt the rise of Italian borrowing costs, traders said.
But the intervention only managed to bring the 10-year yield down to 7.25 percent from 7.46 percent.
(Reporting By Jan Strupczewski; editing by Ron Askew)