Greece struggles to instil confidence as euro zone endures a torrid day

THE EURO zone endured another torrid day as Spanish borrowing costs hit a new record and Greece struggled to instil confidence in its second international bailout.

With inspectors from the EU-IMF troika back in Greece for a new review of the rescue plan, EU Commission chief José Manuel Barroso is due in Athens tomorrow for talks with Greek premier Antonis Samaras.

Mr Barroso has not been to the city since June 2009, four months before the Greek debt debacle erupted, and his imminent visit is seen as a mark of increased urgency in the Greek situation.

Last night Reuters reported that a new round of debt restructuring was on the horizon, with the European Central Bank and euro member states facing losses on their holdings of Greek bonds and loans to the country.

A well-placed official source told The Irish Times it was far too early to forecast that as the troika’s examination of Greece’s debt sustainability had hardly begun.

The source added, however, that such an outcome could not be ruled out eventually.

Talk of the country’s European creditors taking a haircut on their receivables and renewed weekend reports about Greece leaving the euro underscore the acute political difficulty presented by the crisis.

Mr Samaras acknowledged delays to the bailout plan in a speech yesterday, saying his government must redouble its efforts to catch up.

He also hit out at comments from foreign officials about the possibility of Greece leaving the currency. “I say it openly and publicly: they undermine our national effort. We do all we can to bring the country back on its feet and they do all they can so we can fail,” he said.

The anxiety over Greece comes as surging Spanish bond yields fan concern that Madrid will need a full-blown bailout.

While European officials sought to dismiss the current turmoil as a mere outbreak of jitters in thin summer trading, Spanish borrowing costs over five and 10 years rose to their highest level since the euro was introduced and Italian borrowing costs also rose.

European officials argue that Spain does not face an immediate funding cliff as it has already raised more than half the private debt it needs this year.

Still, the country’s autonomous regions are under severe fiscal pressure – a leaked study circulating in Germany said they would need €26 billion in emergency aid from Madrid this year. This figure is €8 billion more than has been set aside for them.

As uncertainty escalates, German finance minister Wolfgang Schäuble was meeting his Spanish counterpart, Luis de Guindos, in Berlin last evening.

Speculation abounded in the German capital that Spain was seeking allies to ask the ECB to buy up Spanish bonds but Berlin officials played down the idea.

“We believe that the reforms already begun by Spain will help calm the markets,” said a German finance ministry spokeswoman.

Officials close to Mr Schäuble said the informal meeting was but an opportunity for a “general exchange of views”.

For its part, the ECB said targeted bond purchases counted as illegal monetary financing of member states. But senior figures outside the ECB believe its chief, Mario Draghi, would act to stabilise restive markets if necessary.

“If we have to intervene, it could be an increase in the firewalls . . . or interventions by the [European] central bank,” said French foreign minister Laurent Fabius.

“The president of the central bank has said, and it’s a statement that we should not take lightly, that he has no hang-up about interventions.”

While Spain succeeded in raising short-term debt yesterday, the rates of interest it paid spiked again. The country raised money for six months at 3.691 per cent, prompting one analyst to point out that the comparable rate in January was below 1 per cent.

The yield on Spanish 10-year bonds climbed to 7.625 per cent, the highest since 1996, before declining but remained at a level considered unsustainable. The five-year yield reached 7.57 per cent.

Italian 10-year bonds rose as high as 6.58 per cent, a dangerous level for a country whose 120 per cent debt-to-GDP ratio is twice the EU’s legal limit.

Even though Moody’s rating agency warned that the crisis now threatened its top-ranked credit status on German, Dutch and Luxembourgish debt, officials say the authorities are determined not to be forced into emergency action during the holiday period.