European finance chiefs will consider how to dig Greece out of its financial hole just as markets batter the bonds of Spain and Italy, opening a new front in the debt crisis.
Italy, struggling with Europe's second-highest debt load after Greece, curbed short selling after its 10-year bond spread over Germany rose to 263 basis points, a Euro-era high.
Italy's effort to build a firewall against the spreading crisis formed the backdrop to meetings on Monday of top European officials in Brussels that will consider a new package for Greece on top of the 110 billion Euros (155 billion USD) pledged last year.
Greece's next package hinges on the EU finding a formula for getting private bondholders to maintain their exposure to the Greek market in a way that doesn't prompt credit-rating companies to declare a formal default.
EU officials are considering a previously rejected German plan for a bond swap after French-led efforts to shepherd banks and asset managers into a voluntary rollover fell short of a target of 30 billion Euros.
From Berlin German Chancellor Angela Merkel said that Italy must demonstrate it is undertaking the budget reforms required to restore confidence in the Euro zone adding and she was confident that it would do so.
“Italy must itself send an important signal by agreeing on a budget that meets the need for frugality and consolidation she told a joint news conference with Icelandic Prime Minister Johana Sigurdardottir in Berlin.
I have full confidence that the Italian government will pass exactly this kind of budget, I discussed on Sunday with the Italian premier,” said Merkel.
Merkel added that Germany agreed with other leaders of the Euro zone that Greece needed fast approval of a second bailout package and her country would, with the rest of the European Union, do everything needed to defend the Euro currency.