EUROPEAN leaders may call a crisis summit this week as the euro zone's debt contagion threatens to devastate the economies of Italy and Spain.
As the debt crisis blazed a trail of market damage worldwide, sapping confidence in the euro, finance ministers from the 17-nation euro zone had a sharp wake-up call from a former colleague, Christine Lagarde, new head of the International Monetary Fund.
She welcomed their vows of the previous day to shore up euro-zone stability.
But she added: "We look forward to the prompt implementation of the important measures outlined."
Ministers pledged after eight-hour talks late on Monday to strengthen the size and scope of a multibillion-euro fund set up after Greece's rescue last year.
The fund could help buy back Greece's mountain of debt, enabling the country to borrow at better rates on the markets, EU officials said. It could also buy debt on the secondary market, relieving Greece's debt mountain.
But a pledge to speed up efforts to put together a bailout for Athens, expected to be almost as big as a ?110 billion ($A145.8 billion) rescue last year, failed to hold the line on financial markets.
Stocks and the euro began tumbling and borrowing costs for Italy and Spain rose to euro-era peaks.
In Brussels, diplomats said a meeting of euro-zone leaders was "under consideration", while the European Council president Herman Van Rompuy said in Madrid that a summit "has not been excluded". Meanwhile, deep divisions remained over the crucial issue of private investors shouldering part of the cost of a second rescue, which the European Central Bank says would lead it to cut off Greek banks.
"We want total coverage of our borrowing requirements and for the stability of the Greek financial system," said Greece's Finance Minister, Evangelos Venizelos.
There is concern too about declaring Greece to be in "selective default", with the European Commission saying it would support any EU banks failing stress tests.
As market turmoil continued for a second day, Mr Van Rompuy told a news conference: "Let me be very clear that there is a very strong commitment at the highest level to do whatever is necessary to safeguard the financial stability of the euro area."
The argument over bringing banks and other private creditors to bear a share in a Greek bailout to ease the European taxpayer's burden has rumbled for weeks.
This approach, opposed by the ECB, is favoured by the governments of Germany, the Netherlands and Finland.
Europe's member states must start speaking "with one voice", said an analyst, Sony Kapoor, managing director of the think tank Re-Define.
"Every new crisis headline fuels a further deterioration of the crisis and triggers more contagion," he said.
"What we are witnessing, and will soon be suffering from, are the inept attempts by politicians and central bankers to duck the consequences of the financial crisis," said another analyst, David Morrison, of the trading firm GFT.
"Now the crisis in Europe has escalated sharply and the rescue facilities currently in place are not robust enough to help.
"On top of that, the US recovery has fallen flat on its face."
Frequently Asked Questions about this Article…
What is the euro zone debt contagion and why should everyday investors care?
The article describes a debt contagion in the euro zone where worries about one country’s debt can spread to others, threatening economies such as Italy and Spain, eroding confidence in the euro and causing global market damage — all of which can affect investment returns and portfolio risk.
Could European leaders call a crisis summit and how might that affect markets?
Euro-zone leaders were reported to be considering a crisis summit to address the turmoil; investors should note that summit talks and announcements can influence market sentiment, but uncertainty about outcomes can also fuel short-term volatility.
What did finance ministers pledge to do to shore up euro‑zone stability?
Finance ministers pledged to strengthen the size and scope of a multibillion‑euro fund set up after Greece’s rescue, with calls for prompt implementation of those measures from the IMF’s Christine Lagarde.
How could the euro‑zone fund help Greece and what does that mean for investors?
According to the article, the fund could buy back Greek debt and purchase debt on the secondary market, which could lower Greece’s borrowing costs and relieve its debt burden — outcomes that could ease market stress if implemented effectively.
Will private investors and banks be forced to share the cost of a Greek bailout?
There were deep divisions: some governments favour making private creditors share part of a second bailout to reduce taxpayer burden, but the European Central Bank warned that such a move could prompt it to cut off Greek banks, so the issue remained unresolved.
What market moves were reported during the crisis in the article?
The article reports that stocks and the euro tumbled while borrowing costs for Italy and Spain rose to euro‑era peaks, and that market turmoil continued for a second day as officials debated responses.
Do analysts think existing rescue facilities are strong enough?
Analysts quoted in the article warned the current rescue facilities were not robust enough to handle the escalating crisis and urged European states to speak 'with one voice' to prevent further contagion.
What should everyday investors watch next amid this euro‑zone debt crisis?
Investors should monitor any decisions from a potential leaders’ summit, the speed and scope of fund enhancements, announcements from the ECB and European Commission, and moves in borrowing costs for Italy and Spain, since headlines and policy steps are driving market contagion.
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