Europe's top banker calls for calm

Europe's top banker calls for calm: "

• Jean-Claude Trichet says euro critics will be proved wrong
• Expert says euro is limping towards its end
• Fears of contagion from Irish bailout are growing

Europe's top central banker tried to calm the financial markets after another turbulent day when the borrowing costs of several major economies remained at unsustainably high levels.

Amid signs that the contagion from Ireland's debt crisis was spreading to some of the biggest economies in the 16 nation eurozone, the premium demanded by investors to hold Spanish, Italian and Belgian government bonds compared with German bonds touched record levels.

French, Portuguese and Irish bonds were also caught up in the rout. However, Europe's political leadership remains adamant that the currency can survive and Jean-Claude Trichet, the European Central Bank president, waded into the argument by calling for more, not less, harmonisation within the eurozone as the way out of trouble.

Speaking at a hearing of the economic and monetary affairs committee of the European parliament in Brussels, he said: 'We have got a monetary federation. We need quasi-budget federation as well. Yes, we could achieve that if there is strong monitoring and supervision of what there is. Because what exists doesn't correspond with the actual situation that we are facing. It is a situation where we need quasi-federation of the budget.'

Analysts saw the remarks as significant and were described by Elisabeth Afseth, fixed income researcher at Evolution Securities, as 'quite astonishing'.

The euro briefly fell below $1.30 for the first time since mid-September after Sunday's €85bn (£71bn) bailout for Ireland failed to contain concerns that other EU countries would need international assistance.

There were also tensions in the money markets where the closely followed rate at which banks lend to each other in dollars – three-month dollar Libor - was fixed at its highest level since late August at 0.3% amid heightened anxiety about the health of major banks in the eurozone. Shares in British, French and Spanish banks were lower while the Portuguese central bank warned the country's banks could face 'intolerable risk' if the country's austerity measures failed.

The borrowing costs of companies were also rising as investors raced to havens such as US and German government bonds and commodities such as gold.

Trichet, who will oversee a crucial ECB meeting on Thursday, insisted to MEPs that eurozone detractors would be proved wrong. 'I would say, by the way, that pundits are tending to underestimate the determination of governments and the determination of the college that makes up the eurogroup, and indeed the 27-member state council.'

But detractors remained out in force. Citigroup's chief economist Willem Buiter, a former member of the Bank of England's monetary policy committee, said: 'There is no such thing as an absolutely safe sovereign.'

He described Ireland as 'insolvent', Portugal as 'quietly insolvent', Greece as 'de facto insolvent' and Spain in need of large-scale restructuring of the debt of its banks. Buiter said the eurozone's problems were an 'opening act' and Japan and the US could soon be caught up in the Irish fallout. Stephen Lewis, of Monument Securities, reckoned the eurozone in its current guise was reaching its end but 'it will limp along for a while to come'.

A crucial test takes place on Thursday when Spain is due to issue three-year bonds. Afseth said: 'If Spain is unable to sell the bonds or only at a high interest rate then that will highlight the problems and the lack of confidence [in the market]'.

Spain has around €9bn left to raise on the markets this year and €150bn next year while Italy, which has also been caught up in the Irish contagion, has €340bn of funding needs in 2011.

Ten-year borrowing costs for Spain rose to 5.59% while the difference with German Bunds was 3.12 percentage points – the largest gap since the euro was launched.

Italy described its public finances as 'sound' even as it became engulfed in fears that it might face difficulties raising funds on the market."