Business News : France draws fire after "alarm bells" warning

PARIS/ROME (Business News) - France came under heavy fire on global markets Tuesday, reflecting fears that the euro zone's second biggest economy is being sucked into a spiraling debt crisis after a warning that Paris's failure to adapt should be "ringing alarm bells."

Global stocks and the euro fell as Italian bond yields climbed back to unsustainable levels on doubts that Italy's Mario Monti and new Greek leader Lucas Papademos, unelected technocrats without a domestic political base, can impose tough austerity measures and economic reform.

European Central Bank President Mario Draghi has predicted the 17-nation currency bloc will be in a mild recession by the end of the year, a view underlined by data showing the economy barely grew in the third quarter and faces a sharp downturn.

"The risks of a technical recession have increased and we expect the economy in Germany to shrink at least in one quarter, most likely in the first quarter of next year," said Michael Schroeder of the German economic research institute ZEW.

On the markets, Italy's 10-year bond yield rocketed back above 7 percent, pushi ng its borrowing costs to a level that helped to trigger the fall of Silvio Berlusconi's government last week and is widely seen as unsustainable in the long term.

Spain's Treasury paid yields not seen since 1997 to sell 12- and 18-month treasury bills.

French 10-year bond yields have risen around 50 basis points in the last week, pushing the spread over safe haven German bonds to a euro-era high of 173 basis points.

French banks are among the biggest holders of Italy's 1.8 trillion euro public debt pile.

The urgency of resolving the debt crisis was underscored by a think-tank report saying that triple-A rated France should also be "ringing euro zone alarm bells" as it could not make rapid adjustments to its economy.

"THREAT TO THE WORLD"

Fears are growing in the United States that Europe's debt crisis is mushrooming into a wider systemic problem.

President Barack Obama's top economic adviser said the European debt crisis was the leading risk to the U.S. recovery.

"Clearly, Europe is a tremendous concern," Alan Krueger, chairman of the White House Council of Economic Advisers, said.

"It is important they act quickly, because it is a threat not only to Europe and the U.S. but the world as a whole."

But Greek conservatives set themselves on a collision course with the European Commission, refusing its demand to sign a pledge to meet the terms of a bailout designed to save Greece from bankruptcy and safeguard the euro zone.

Members of the New Democracy party, a key player in Papademos's new crisis coalition, said they would not bow to "dictat es from Brussels" to give a written guarantee.

With the survival of the 17-state currency zone in its current form now at risk, EU governments have until a summit on December 9 to come up with a bolder and more convincing strategy, involving some form of massive, visible financial backing.

Peter Bofinger, a member of the group of economists who advise the German government, said the ECB should become the euro zone's lender of last resort if the bloc's debt troubles threatened to rip apart the financial system.

Although anathema in Germany, many analysts believe the only way to stem the contagion for now is for the European Central Bank to buy large amounts of bonds without sterilizing their purchases -- effectively the sort of quantitative easing undertaken by the U.S. and British central banks.

"If politics can't do it, then the ECB must do all it can to bring interest rates down to more reasonable levels," Bofinger said at Euro Finance Week. [ID:nL5E7MF2VR]

NEW ITALIAN CABINET SEEN WEDNESDAY

The debt crisis is likely to make matters worse in the next months with nations such as Italy, Greece, Ireland, Portugal and Spain forced to adopt politically unpopular cuts to stop the bond market driving them toward default.

Economists say there is no visible growth strategy in place to counter those austerity measures.

After last week's disastrous week for the euro zone's third biggest economy, Italy's Monti appeared to secure a breakthrough Tuesday when Angelino Alfano, secretary of Berlusconi's People of Freedom (PDL) party, emerged from the talks saying moves to form a government would succeed.

In brief comments to reporte rs, the prime minister-designate said he would present the results of his political consultations to President Giorgio Napolitano early Wednesday, hinting he had cleared any obstacles to forming a government.

"I would like to confirm my absolute serenity and conviction in the capacity of our country to overcome this difficult phase," Monti said.

His technocrat-led cabinet have the job of speeding up reform of pensions, labor markets and business regulation in order to put Italy's finances on a sustainable path. It must refinance some 200 billion euros ($ 273 billion) of bonds by the end of April.

With the euro zone under intense scrutiny, Germany and France posted solid growth in the third quarter, according to statistics released Tuesday, but euro zone nations on the front line of the debt crisis fared much worse and analysts expect bleaker times ahead in the co re economies.

"Forward-looking indicators suggest that the euro zone economy is likely to drop back into recession in the fourth quarter and beyond," said Jonathan Loynes, chief European economist at Capital Economics.

The euro zone economy grew just 0.2 percent in the third quarter, lifted by France and Germany, but economists were resigned to the fact the bloc was almost certainly heading for a recession.

GREECE MUST SIGN

Greece's failure to convince markets and its European partners that it can act decisively to rescue its finances is also fuelling the crisis, though Finance Minister Evangelos Venizelos told parliament the government would submit plans to overhaul the tax system by early next year.

But the conservatives on whom new Greek premier Papademos is reliant for support demanded pro-growth policies and rejected more cuts, fuelling fears of a Greek default that may force Athens out of the currency group.

New Democracy leader Antonis Samaras said he would not vote for more austerity measures and would not sign any pledge about new belt-tightening. His party was, however, expected to back Papademos in a parliamentary vote of confidence Wednesday.

The European Commission demanded Greece provide written confirmation of its commitment to reforms to bring down its debt, no matter who wins the next election.

"The Eurogroup as a whole expects Greece, the Greek political forces, to provide a clear and unequivocal commitment to the agreement ... and we expect this in writing. It has to be a letter and signed," Amadeu Altafaj, Commission spokesman on economic and monetary affairs, told reporters.

Most Greeks hailed Papademos's appointment, but thousands of people angry at more than a year of austerity are expected to rally Thursday, the anniversary of a 1973 student uprising that helped to bring down the colonels' junta of 1967-74. ($ 1 = 0.734 Euros)