EU ministers warned of potential Italy insolvency (by Barbara Kollmeyer)

MADRID (MarketWatch) -- European finance ministers meeting on Tuesday evening were told Italy is at risk of insolvency, with a potential devastating impact on the euro and big economies of Germany and Spain, according to a confidential report obtained by the Guardian newspaper. The report from the European Commission and the European Central Bank said Italian Prime Minister Mario Monti would need to take deeper steps to combat his country's crisis, such as fighting tax evasion. The report said that without a determined policy response, risks of a full-blown sovereign liquidity crisis could ramp up. "Persistently high interest rates increase the risk of a self-fulfilling 'run' from Italy's sovereign debt. A liquidity crisis could then turn into a solvency crisis, whose repercussions for other large euro-area countries would be very acute given their exposure to the Italian economy," the report said, according to the newspaper. Spokespersons from the ECB and EC did not immediately return calls for comment.