France and Germany, Europe's two central powers, have stepped up their war of words over whether the European Central Bank should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases failed to calm markets.
Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France urged stronger ECB action, adding to mounting global pressure spelled out by U.S. President Barack Obama.
Bond market turmoil is spreading across Europe. Italian 10-year bond yields have risen above 7%, unaffordable in the long term. Yields on bonds issued by France, the Netherlands and Austria — which along with Germany form the core of the euro zone — have also climbed.
Asian shares and the euro fell further on Thursday as doubts deepened about Europe's ability to stop its sovereign debt crisis from spinning out of control.
MSCI's broadest index of Asia Pacific shares outside Japan fell 0.2%, while Japan's Nikkei stock average opened down 0.5%.
The euro hovered near five-week lows against the dollar, trading not far off Wednesday's trough around $1.3430, a low not seen since Oct. 10.
"The ECB's role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures to ensure financial stability in Europe," French government spokeswoman Valerie Pecresse said after a cabinet meeting in Paris.
French Finance Minister Francois Baroin repeated Paris's view that the euro zone's EFSF bailout fund should have a banking licence, something Berlin opposes. Such a move would allow the fund to borrow from the ECB, giving it extra firepower to fight the spreading crisis.
But German Chancellor Angela Merkel made clear Berlin would resist pressure for the central bank to take a bigger role in resolving the debt crisis, saying European Union rules prohibited such action.
"The way we see the treaties, the ECB doesn't have the possibility of solving these problems," she said after talks with visiting Irish Prime Minister Enda Kenny.
The only way to recover markets' confidence was to implement agreed economic reforms and build a closer European political union by changing the EU treaty, Merkel said.
ECB policymakers continue to reject international calls to intervene decisively as Europe's lender of last resort, stressing that it is up to governments to resolve the debt crisis through austerity measures and reforms.
However, many analysts believe such a move now represents the only way to stem the contagion, despite the potential risk of inflation from printing money.
SHORT RESPITE
Traders said the ECB bought Spanish and Italian bonds on Wednesday, but the respite was short and there was no sign of a change in its policy of limited, stop-go purchases to calm markets temporarily while maintaining pressure on governments.
Fitch Ratings warned it might lower its "stable" rating outlook for U.S. banks because of contagion from problems in troubled European markets.
International efforts to fight Europe's worsening debt crisis received a setback when the IMF's European chief resigned, citing personal reasons.
Antonio Borges last month suggested the IMF could buy Spanish or Italian bonds alongside the euro zone's bailout fund but quickly backtracked, saying the IMF could only lend to states, not intervene in bond markets directly.
In Italy, new Prime Minister Mario Monti was expected to unveil his policy programme on Thursday the day after being sworn in at the head of a 16-strong cabinet of experts.
The respected economics professor kept the key economy portfolio for himself and the broad thrust of his platform is expected to match reform demands made by European authorities.
Controlling public spending, reforming the pension system, loosening job protection measures, opening up protected professions to more competition and imposing a tax on private assets are some of the measures he could announce.
With Italy's borrowing costs now at untenable levels, Monti will have to work fast to calm financial markets that Italy needs to refinance some 200 billion euros ($273 billion) of bonds by the end of April.
Some analysts say his cabinet of technocrats could be vulnerable to ambushes in parliament, but Monti said the absence of politicians in the team would free its hands.
Federico Ghizzoni, chief of Unicredit, said he would ask the ECB to increase access to central bank funds for Italian banks, whose funding problems have grown since Italy was sucked into the debt crisis in July.
SYSTEMIC CRISIS
ECB President Mario Draghi has said the 17-nation currency bloc will be in a mild recession by the end of the year, making it tougher for governments to put their finances in order, and Europe's debt crisis is also increasing strains in the money market, the plumbing of the international financial system.
Euro zone banks are finding it harder to obtain dollar funding. While the stresses are nowhere the levels of the 2008 financial crisis, they have continued to mount despite ECB moves to provide unlimited liquidity to banks.
