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Papandreou Sees Make-or-Break Time in Debt Crisis on Eve of Europe Summit

Greek Prime Minister George Papandreou says Europe’s leaders need to show tomorrow that they can resolve the European Union debt crisis to avoid a contagion enveloping Italy and Spain.

“It could be a make-or-break moment for where Europe is going,” Papandreou said during an interview in his Athens office at Parliament yesterday. “Markets are saying pretty much what I’m saying too: that Greece is doing what it can, but that Greece is not going to be able to carry the weight of all of Europe and the other problems that Europe has.”

Papandreou plans to meet with EU leaders in Brussels tomorrow as officials struggle to agree on measures to restore confidence in the euro region’s creditworthiness after the last year’s financial rescue of Greece. Policy makers are divided on how to prod investors into financing a new bailout package and whether the 17-nation euro area should issue eurobonds to help debt-laden nations across the bloc tap markets.

German Chancellor Angela Merkel said yesterday Europe’s fiscal crisis can’t be solved in one go. European officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to help stabilize the region’s debt market, a person close to the talks said.

Photographer: Kostas Tsironis/Bloomberg

"It could be a make-or-break moment for where Europe is going," Greece's prime minister George Papandreou said. Close

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Photographer: Kostas Tsironis/Bloomberg

"It could be a make-or-break moment for where Europe is going," Greece's prime minister George Papandreou said.

“Nobody should be under any illusion; the situation is very serious,” European Commission President Jose Barroso told reporters in Brussels today. “It requires a response. Otherwise, the negative consequences will be felt in all corners of Europe and beyond.”

Rising Yields

Spanish and Italian 10-year bond yields have climbed more than 70 basis points since the end of June and the Treasury in Madrid said yesterday it sold 3.8 billion euros ($5.4 billion) of 12-month bills at a yield of 3.702 percent, up from 2.695 percent the last time the securities were sold on June 14. The yield on two-year Greek notes rose above 40 percent earlier today for the first time.

“We have to look at the wider issues,” Papandreou said. “If the spreads in Italy and in Spain go up, these are questions that Greece is not going to solve solving its internal deficiencies, which it’s doing.”

The extra yield that investors demand to hold 10-year Italian bonds over German bunds rose to a euro-era record of 332 basis points on July 18. The Spanish spread hit 367. The premium on Greek debt was 1,556 basis points.

Political Survival

The 59-year-old premier battled for political survival in June as the EU and International Monetary Fund held back approval of a 12 billion-euro payment in return for parliamentary backing for a new 78 billion-euro, five-year package of budget cuts and state asset sales. Papandreou changed his cabinet, replaced his finance minister, won a confidence vote and then backing for the austerity measures, amid protests and slumping support in opinion polls.

“We have done what is necessary and are doing what is necessary to put our house in order,” Papandreou said. “There are certain systemic issues within the euro that we have to deal with where we have a common currency but different borrowing policies, different tax policies, different competitiveness of our economies.”

EU President Herman van Rompuy called leaders to a second summit meeting in a month to discuss “the financial stability of the euro area as a whole and the future financing of the Greek program.” Stocks declined around the world on July 18, the euro fell and the cost of insuring European sovereign debt rose to records amid concern the euro region isn’t any closer to solving the crisis a year after Greece’s initial rescue.

Focus on Eurobonds

The situation worsened this month as EU governments squabbled with each other and the European Central Bank. ECB President Jean-Claude Trichet said July 10 that Europe is at the “epicenter” of a debt crisis that concerns the entire developed world and urged the euro area to do the “maximum” in terms of governance reforms.

Some finance ministers have started to focus on eurobonds as part of the solution. While jointly issuing bonds with the most creditworthy European countries may help debt-laden nations tap markets at lower interest rates, it could also raise borrowing costs for Europe’s largest economy, Germany.

Papandreou, who has spoken in favor of issuing such securities, said such sales would create “a sense of security.” His office said today he’s spoken to Barroso and to the prime ministers of Italy, Portugal, Spain and Ireland over the past two days, as well as with van Rompuy.

Merkel Ally

Eurobonds would “overstretch solidarity” between the region’s members, said Thomas Silberhorn, European Affairs spokesman for Merkel’s Bavarian Christian Social Union ally, yesterday. They would force donor countries such as Germany to accept liability for the debts of all other members, he said.

Papandreou, who met with U.S. Secretary of State Hillary Clinton in Athens on July 17, said there was “direct interest” from the U.S. in solving the debt problem and that its experience in Latin America and its involvement in the IMF may aid Europe in dealing with its “new” problem.

“Europe is a strong market for the U.S.,” he said. “If it has problems, if there’s a lack of consumer confidence, if there’s a deeper recession, this will deeply affect jobs in the U.S.”

To contact the reporters on this story: Maria Petrakis at mpetrakis@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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