Western leaders huddled on preventing the debt crisis from spreading to the core of the euro area after the biggest weekly decline in global stocks since 2008. President Barack Obama and British Prime Minister David Cameron joined consultations with euro-area counterparts in telephone conversations yesterday as investors signaled concern that a July 21 agreement to expand the 440 billion-euro ($623 billion) rescue fund would fail to stop the rot. After a series of calls involving German Chancellor Angela Merkel, French President Nicolas Sarkozy, Spanish Prime Minister Jose Luis Rodriguez Zapatero and Italian Prime Minister Silvio Berlusconi, European leaders pledged to push implementation of last month’s deal on the European Financial Stability Facility. Berlusconi announced measures to speed austerity measures and to target a balanced budget in 2013, a year ahead of schedule. “The July 21 plan is a good plan, it’s an excellent plan, and investors have to hear it,” French Finance Minister Francois Baroin said on France Info radio. “We need rapid and operational decision making, and there are improvements that can be done in European economic governance. That’s what President Sarkozy and Chancellor Merkel are working together to do.” While Zapatero and Berlusconi worked from their capitals, Sarkozy placed his calls from his wife’s holiday home in the south of France, Merkel spoke during a walking holiday in the Italian Alps, and Cameron worked from a rented villa in Tuscany. Merkel spoke to Obama after talks among the Europeans, while Sarkozy and Berlusconi said they were due to speak to him. Merkel alone spoke to Cameron, according to statements from the leaders. Zapatero spoke to Berlusconi and Sarkozy. Global Stocks World stock markets have lost more than $4.4 trillion since July 26 as speculation mounts that the global economy faces a new recession that would deepen Europe’s debt woes. The Stoxx Europe 600 Index fell 9.9 percent this week, and the MSCI World Index slumped 8.5 percent. For both, it was the worst week since November 2008. While yields on Italian and Spanish debt fell yesterday, they have surged since the July 21 European Union summit aimed at heading off debt contagion to the euro zone’s third and fourth largest economies. Italian 10-year bond yields are up 76 basis points since the summit, while Spanish yields are up 33 basis points. The difference between the yield on 10-year Italian bonds and similar German securities hit 389 basis points yesterday, a record since the adoption of the single currency. The spread ended the trading day at 374 basis points. Ten-year Spanish yields dropped 24 basis points to 6.04 percent and fell 11 basis points to 6.09 percent in Italy. Spanish Yields Spanish borrowing costs are below those of Italy for the first time since May 2010 on speculation Italy’s higher debt load makes it less able to withstand contagion from the region’s fiscal crisis. “If this is enough to calm markets depends on whether the market believes it or not, but today’s decisions by the Italian government are certainly a step in the right direction,” Chiara Corsa, an economist at UniCredit Research in Milan, said in a note to clients. “There are no doubts that the government pledged to deliver what has been called for.” European Union Economic and Monetary Commissioner Olli Rehn, in a Bloomberg Television interview in Brussels, called for country-by-country approval of the upgraded bailout mechanism by early September. Policy makers, who have been fighting the debt crisis since its outbreak in Greece in late 2009, need to be “more disciplined” in communicating with markets, Rehn said, adding that European leaders were surprised by the bond selloff in the wake of the summit. Summit Agreement European governments agreed to empower the rescue fund to buy bonds in the secondary market, offer precautionary credit lines and lend to recapitalize banks. The euro was up 1.4 percent at $1.4282 per euro late yesterday in New York. The European Central Bank restarted its bond-purchase program yesterday following a four-month hiatus and didn’t extend the purchases to Italy and Spain, the two countries at the center of the current turmoil, after opposition from Germany. An emergency meeting in coming days of finance ministers from the Group of Seven nations may also be in the works. While Berlusconi told reporters that he and Sarkozy agreed to such a gathering, a spokesman, Paolo Bonaiuti, subsequently said that no decision has been made. To contact the reporter on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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