Aug. 6 (Bloomberg) — Italy's Prime Minister Mario Monti warnedof a potential breakup of Europe without greater urgency in effortsto lower government borrowing costs, as a stand-off over EuropeanCentral Bank help for Italy and Spain hardened.

Monti, in an interview with Germany's Der Spiegel magazinepublished yesterday, said that disagreements within the 17- nationeuro area are detracting from the policy response to the debtcrisis and undermining the future of the European Union.

“The tensions that have accompanied the euro zone in the pastyears are already showing signs of a psychological dissolution ofEurope,” Monti told Der Spiegel. While he backed the ECB'swillingness to address “severe malfunctioning” in the governmentbond market, Monti said the problems “have to be solved quickly nowso that there's no further uncertainty about the euro zone'sability to overcome the crisis.”

Spain and Italy, whose surging borrowing costs have shunted themto the heart of the turmoil in the euro area, are resistingpressure from ECB President Mario Draghi to formally request aid inreturn for strict conditions before the central bank will buy theirbonds. Monti and Spanish Prime Minister Mariano Rajoy have bothsaid they will await further details as the ECB works up its plan.The German government said for the first time today that ChancellorAngela Merkel supports Draghi's proposals.

French President Francois Hollande is pushing Monti and Rajoy torequest aid from Europe's bailout fund to help ease markets andprotect France from speculation, Italian newspaper la Repubblicareported, without citing anyone. Monti may speak with Draghi today,the newspaper said.

Kiss of Death

“Italy has, to all intents and purposes, been hung out to dry,”Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd.,said in an e-mailed comment. “As far as Rome is concerned anyexternal assistance would be the kiss of death. This puts Mr. Montiin an untenable situation.”

Monti isn't under pressure from Hollande to requestinternational rescue funds and has no plans to meet Draghi today,an Italian government official said, who asked not to be identifiedbecause any such discussions would be private.

Italian 10-year bond yields fell 6 basis point to 5.98 percentas of 2:15 p.m. in Berlin after rising to 6.28 percent as Draghioutlined his plan on Aug. 2. Spain's 10-year bond yielded 6.76percent, down 9 basis points, after rising as high as 7.44 percent.Equivalent German debt yields 1.36 percent.

The euro dropped 0.2 percent to $1.2362.

Troika Talks

Greece, the country at the nexus of the debt crisis, agreedafter more than a week of meetings with representatives of theso-called troika of international creditors — the InternationalMonetary Fund, the ECB and the European Commission — on the need tostrengthen policy efforts to support the economy and comply withits bailout terms.

“We made a lot of good progress,” Poul Thomsen, the IMF'srepresentative to Athens, said after a meeting with FinanceMinister Yannis Stournaras ended yesterday. The troika will returnto Athens in early September.

Investors and politicians are meanwhile grappling with thesignificance of Draghi's comments on sovereign debt purchases.While markets initially tumbled after Draghi said Spain and Italywould have to formally request a resumption of the bank's bondbuying in conjunction with Europe's bailout fund, thus enteringinto a rescue program with tough conditions, they rallied thefollowing day as investors concluded that ECB action would happen,albeit on an unknown future date.

Liquidity Backstop

“If the arrangement sketched out is fully implemented, the ECBwill provide an effective liquidity backstop, enabling sovereignsto retain access to markets for a large portion of their fundingneeds,” Bruce Kasman, chief economist at JPMorgan Chase & Co.,said in an Aug. 3 note to clients.

The German government is “not worried” by Draghi's announcement,Georg Streiter, Merkel's deputy spokesman, told reporters in Berlintoday. Draghi “clearly addressed the primacy of politics in theeuro crisis and the government has no doubt that everything theEuropean Central Bank does happens within the framework of itsmandate,” Streiter said.

Spain and Italy suggested that bailout requests may not beimminent or necessary.

Monti told Spiegel that he intends to stay in office until April2013, when Italy is due to hold elections, and he hopes he “cansave Italy from financial ruin until then, with the moral supportof some European friends, and Germany foremost. But I say veryclearly: moral support, not financial.”

Draghi Misunderstood

Spanish Economy Minister Luis de Guindos told ABC newspaper atthe weekend that his country awaits details of the ECB'sbond-buying proposals before deciding whether to request aid. BothItalian Bank of Italy Governor Ignazio Visco and Minister forEconomic Development Corrado Passera said in separate newspaperinterviews that the country doesn't need a bailout.

Visco told La Repubblica that markets had initiallymisunderstood Draghi's comments.

“Not only did the ECB not take any steps backward, but it tookdecisive steps forward to correct the functioning of monetarypolicy transmission, and therefore of the stability of the singlecurrency,” he told the newspaper.

Euro-area finance chiefs won't meet until Sept. 3 to discusspossible Spanish bond buying and the economic situation in Greece,Italian news agency Ansa reported Aug. 3, citing unidentifiedEuropean officials. European governments would not confirm themeeting. The next meeting of the ECB's governing council isscheduled for Sept. 6.

German Criticism

Draghi's plans to reactivate the ECB's bond-buying programprompted some criticism in Germany. Former ECB Chief EconomistOtmar Issing said price stability is “massively threatened,”Frankfurter Allgemeine Sonntagszeitung reported yesterday, whileJuergen Stark, Issing's successor who is now retired from the ECB,said the central bank is being asked to act outside its mandate,faces conflicts of interest and is losing its independence, thesame newspaper said.

Monti garnered criticism from German lawmakers over his commentsin Spiegel calling on governments to exercise greater autonomy fromnational parliaments in taking crisis decisions or risk making aeuro-area breakup more likely. German lawmakers have a veto righton disbursements from Europe's bailout fund.

Alexander Dobrindt, general secretary of Merkel's CSUBavarian sister party, said in an interview with the RheinischePost newspaper Monti's comments were an “attack on democracy.”

Merkel sees Germany as having had positive experiences with “theright degree of support by the parliament and the right degree ofparticipation by parliament,” Streiter said. “It would be good ifthe debate was guided by a bit more calm.”

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