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Top officials of the European Council, the European Central Bank and the European Commission will hold an emergency meeting Monday to discuss the possibility that the debt crisis could spread to Italy from Greece, according to a media report Sunday.

The meeting comes in the wake of the sharp sell-off in Italian assets on Friday, Reuters reported, citing three unnamed official sources.

On Friday, Italian government bond yields jumped, as did the cost of insuring Italian sovereign debt against default, as worries grew over Finance Minister Giulio Tremonti’s possible exit.

Reuters

Italian Prime Minister Silvio Berlusconi (right) and Finance Minister Giulio Tremonti speak after the cabinet approved a $66.55 billion austerity package aimed at shielding the country from the Greek debt crisis and eliminating the budget deficit in 2014.

The finance minister was tied to a corruption investigation involving a member of parliament and former aide. Conflicts between Tremonti and Silvio Berlusconi’s conservative government have also been rising. Read more: Political turmoil puts Italy in spotlight.

Tremonti has been credited with keeping Italy, the euro zone’s third-largest economy, removed from the worst of the euro-zone debt crisis.

Monday’s emergency meeting will be held before a previously scheduled meeting of the euro zone’s 17 finance ministers to discuss details of the second Greek bailout and bank stress-test results due Friday, Reuters said.

Politicians and banks are trying to work out a plan in which financial institutions would voluntarily roll over some of Greece’s maturing debt — a move that would spread at least some of the cost of another Greek bailout to private bondholders. ’

Also on Sunday, European Central Bank President Jean-Claude Trichet said that more work needs to be done on regulating non-bank financial institutions, The Wall Street Journal reported on its website.

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Europe's week ahead: stress tests

Results of the second round of European bank stress tests will be released on Friday, reports MarketWatch’s Polya Lesova.

“The major revelation of the last four years was the fragility of the global economy,” Trichet told the Rencontres Economiques d’Aix-en-Provence conference, according to the report. “Strengthening resilience is absolutely essential given the fragility exhibited by the global economy.”

The European Union also needs stronger coordination of public spending, he added.

“We evidently need a strengthening of governance for the constellation of sovereign states that we have seen working together so effectively in terms of creating wealth,” he said, and that may someday mean the installation of a single euro-zone finance minister, according to the

For investors unsettled by repeat warnings of debt crises and economic slumps, cash deserves a second look. And a third and fourth.

Thanks to the exposure of many money-market funds to European bank debt, and the ultralow yields on other cash-like alternatives, allocating a bigger chunk of your savings to cash requires a reassessment of your risk — and the type of reward you expect.

The first thing to consider is how long you expect to keep your funds in cash. For some, that can be three to five years, making certificates of deposit more attractive. For those who want to access the cash within six months, high-yield savings and money-market funds may offer a better option.

Choosing the right vehicle for cash savings also depends on how soon you expect interest rates to rise, which is a big wild card. Interest-rate-futures traders and Wall Street economists expect the Federal Reserve to raise its target fed funds rate sometime between spring and fall of 2012 — about a year away.

Hopes for the economy’s rebound were pushed out further after a very weak payrolls report for June. Read about June payrolls report.

But they’ve been forecasting rate hikes a year off for at least the past year, and these predictions have fallen flat thanks to the economy’s unusually slow and uneven recovery. For those who expect the Fed to keep benchmark rates low for longer, analysts advise looking for alternatives to money-market funds, whose rates are closely tied to the fed funds rate, which is near 0%.

And lastly, investors who are happy to keep a portion of their savings in a money-market fund should check the fund’s literature to determine how much it holds in European bank debt — a potential source of credit risk if Greece or another European country defaults.

Checking, savings options

With all these alternatives, some financial advisers recommend investors look at online savings accounts or high-yield checking accounts as offering the best choices for yield, safety and easy access.

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Looking for signs of a rebound

There's no silver lining in the jobs report but economists are still not giving up on signals of a turnaround, Societe Generale economist Stephen Gallagher explains.

“For liquid cash, people are better served with online savings accounts or high-yield checking accounts,” said Greg McBride, senior financial analyst at BankRate.com.

“As long as it’s protected by the Federal Deposit Insurance Corp., it doesn’t matter if the bank is across the street or across the country,” he said.

Some online banks are offering 1.1% for their online savings accounts, according to Bankrate.com. That’s See rates on Bankrate.com.

The average money-market fund’s seven-day yield is 0.05%.

As for high-yield checking accounts, there are usually some requirements that need to be met: that you use direct deposit, paperless statements, or make a certain number of debt-card transactions, McBride said. For that, the average federally insured rate is 2.56%, according to Bankrate.com.

Schwab is also finding that many clients want more than just money-market funds to preserve cash.

Schwab Bank, a subsidiary of Charles Schwab Corp. SCHW -1.31% , has a high-yield investor checking account and high-yield investor savings offering that clients use as a cash alternative, and are linked to their Schwab account, said Jeff Morley, who heads up Schwab’s team of portfolio consultants. See more on Schwab’s high-yield checking account.

The checking account yields 0.25% and the savings account yields about 0.4%.

With the tough jobs situation, economists say supporting government work-sharing programs would be a smart move.

Friday morning’s jobs report showed that June employment was “essentially unchanged,” with nonfarm payrolls rising a low 18,000. Private payrolls gained 57,000 jobs, led by services. Meanwhile, government jobs fell 39,000, with local government down 18,000, led by education, federal employment down 14,000, and state government employment down 7,000. See our complete report on “Hiring weak in June”.

What to do?

Work-sharing programs aim to encourage companies to reduce hours for workers rather than lay them off, with the government making up a portion of workers’ earnings that would otherwise be lost. While workers may not hold onto a whole paycheck, they do take home greater earnings than they would otherwise, and more remain employed.

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We've seen this debt movie before...1990
WSJ's Laura Meckler takes us back to 1990 when President George H.W. Bush locked horns with Congress over spending and raising the debt ceiling. Sound familiar?

Democratic lawmakers recently introduced a bill that would provide states with temporary federal financing for work-sharing benefits paid to workers. States with already existent and approved programs would receive 100% federal financing for benefits that are paid to workers, while other states would receive a lower rate.

Dean Baker, co-director of the left-leaning Center for Economic and Policy Research, said work-sharing programs “could be enormously helpful,” reducing the number of workers laid off each month.

“Also, it doesn’t cost much since it just uses money that would otherwise be paid out in unemployment insurance and divides it among people working shorter hours,” Baker said.

In an opinion piece published last year, conservative economist Kevin Hassett joined Baker in advocating for work sharing.

“After surveying policies around the world, we found that there is one that clearly dominates in terms of impact and cost-effectiveness: work-sharing,” Hassett and Baker wrote. “The idea is simple. Currently, firms mostly respond to weak demand by laying off workers. Under a work-sharing program, firms are encouraged by government policy to spread a small amount of the pain across many workers.”

The economists pointed out another benefit of keeping workers on with reduced hours, rather than laying them off.

“As firms ramp up production, the workers they need to do the work will already be on staff,” they wrote. “Firms can avoid spending time and money searching for new workers.”

There is some debate over how effective actual subsidized work-sharing programs are at keeping up employment, said Larry Katz, an economist at Harvard University.

“They may largely subsidize firms that would cut hours anyway or they may lead existing workers to bid up wages ... offsetting the impacts in preserving employment,” Katz said.

In a press conference Monday, Obama calle

d for compromise as party leaders seek to craft a deal that raises the

legal limit on how much the U.S. government can borrow while slashing projected deficits over the next decade.

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Obama on 'doing the biggest deal possible'

President Barack Obama holds a presser on the debt crisis and highlights what it will involve to resolve the current concerns. Video courtesy of Fox News.

Democratic and Republican leaders held talks Sunday, but discussions broke down over taxes and the meeting ended quickly. Obama said he would keep convening party leaders every day until a debt-limit deal is reached. He also said he would reject a stopgap measure of 180 days or less.

Congress has to raise the federal government’s legal debt limit by Aug. 2 or the nation could be in danger of defaulting on its debt, Treasury Secretary Timothy Geithner has said. A U.S. default could put the economy back into recession and create panic in global financial markets.

The Treasury is already bumping up against a congressionally imposed borrowing limit of $14.3 trillion. The debt ceiling would need to be raised by about $2 trillion to allow the U.S. government to function normally until the 2012 election, based on the current rate of federal spending.

During the past few weeks talks about the debt limit morphed into a broader discussion between Obama and Republican House Speaker John Boehner over a much bigger deal that could cut long-term deficits by up to $5 trillion. Yet Boehner poured cold water on the idea of a “grand compromise” this weekend after Democrats insisted on sizable tax increases, Republicans say.

Republicans insist they won’t impose new taxes as part of a pact to increase the debt limit, arguing it would weaken the economy. Democrats say spending cuts alone can’t resolve the nation’s budget problems and that tax increases need to be part of the mix.

Congressional leaders will meet again Monday to try to breath fresh life into faltering talks. Obama said the two sides should continue to work on a longer-range compromise.

“The things I will not consider are a temporary stopgap measure to the problem,” Obama said. “This is the United States of America. We don’t manage our affairs in three-month increments.”

Exploding deficits

The Republican-controlled House has demanded Obama agree to reduce future spending by the same amount as any increase in the debt ceiling. Over the next 10 years the U.S. is projected to spend $46.1 trillion, which would add $7 trillion to the federal debt, according to the Congressional Budget Office.

Click to Play

We've seen this debt movie before...1990
WSJ's Laura Meckler takes us back to 1990 when President George H.W. Bush locked horns with Congress over spending and raising the debt ceiling. Sound familiar?

Independent budget experts say that even a deal to lower long-term deficits by $2 trillion will be hard to accomplish. Conservatives are balking at any tax increase and liberals are loathe to cut large entitlement programs such as Medicare, Medicaid and Social Security.

“You need about $2 trillion in actual deficit reduction to get us through two years. That is by itself a very daunting number,” said Bill Galston of the Brookings Institution think tank. “I am scratching my head as how they get to an intermediate solution.”

Obama acknowledged Democrats are resistant to cuts and he said he’s prepared to “take significant heat from my party” to achieve a big deal that puts the U.S. government on much sounder financial footing. He said Republicans also have to compromise.

“I do not see a path to a deal if they do not budge, period,” he said. “If their basic proposition is ‘my way or the highway,’ there probably won’t be a deal done.”

Yet Obama also said he’s not asking Republicans to raise taxes before 2013. He indicated a preference for letting tax cuts passed under the Bush administration to expire at the end of 2012 as scheduled.

“Nobody has talked about increasing taxes now or next year,” he said.

Any deal is likely to involve sizable cuts in discretionary programs, which is basically everything else the government spends money on besides entitlements. There’s also a chance Republicans will accept the elimination of some tax breaks and perhaps even modest reductions in defense spending, though not the deep cuts sought by Democrats, experts say.

Whatever party leaders agree to has to win support in a U.S. House in which fiscal conservatives dominate. If not enough Republicans go along, Boehner would need some votes from a largely liberal Democratic caucus. It would be a hard sell.

“There remains far too much complacency and far little appreciation for the politics of the vote on the debt ceiling,” said Chris Krueger, a congressional analyst at MF Global in Washington, DC.

Despite all the hand-wringing in Washington, Wall Street still assumes that lawmakers will reach a deal in time.

“Asking what the U.S. economy might look like after a possible U.S. Treasury default is akin to asking, ‘What will you do after you commit suicide?’” Citigroup economic strategist Steven Weiting told clients.

Jeffry Bartash is a reporter for MarketWatch in Washington.