European finance chiefs clashed over how to dig Greece out of its financial hole just as markets battered the bonds of Spain and Italy, opening a new front in the debt crisis.
Finance ministers weighed how to get private bondholders to maintain their exposure to Greek debt in a way that doesn’t prompt credit-rating companies to declare a formal default.
Forcing bondholders to chip in would be “fatal,” Austrian Finance Minister Maria Fekter told reporters before a crisis meeting in Brussels today. “We will now in the eurogroup discuss the proposals on the table and their impact with respect to a Greek insolvency or classification as an insolvency.”
Bonds of debt-strapped countries plunged, the euro sank and stocks dropped amid concern that European governments are powerless to prevent the financial distress spreading from Greece. Italy’s effort to build a firewall against the spreading crisis formed the backdrop to today’s meeting of finance ministers that will consider a new package for Greece on top of the 110 billion euros ($155 billion) pledged last year.
Italy, struggling with Europe’s second-highest debt load after Greece, curbed short selling as its 10-year bond spread over Germany surged to 305 basis points, a euro-era high. The extra yield, a sign of investors’ doubts about Italy, more than doubled from its 2011 low of 122 basis points on April 12.
Italian assets were upended by doubts whether Prime Minister Silvio Berlusconi, plumbing record-low approval ratings with two years left in office, will muster the political strength to push through 40 billion euros in planned deficit-cutting measures.
“Italy can get out of this situation on its own and with the help of all European countries but not with financial aid,” Spanish Economy Minister Elena Salgado said.
A lunchtime crisis-management session including European Union President Herman Van Rompuy, European Central Bank President Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker preceded the regular ministerial meeting.
Europe faces “another summer of uncertainty” with an accord on Greece unlikely before September, London-based Citigroup Inc. economists including Michael Saunders said in a research note. “The uncertainty is likely to propel the flight of investors out of non-core sovereign bonds and deposit flight out of periphery country banks.”
Greece’s uphill struggle for solvency was dramatized by data showing the central government’s deficit widened 28 percent in the first half of 2011, with spending surpassing targets and revenue falling short.
Greece’s next package hinges on the EU finding a formula for getting investors to roll over Greek debt holdings so that governments don’t have to pick up the tab when bonds come due between 2012 and 2014.
“Some rating agencies say it’s very difficult to have a plan that is completely voluntary and that even if the scheme is on a voluntary basis some agencies will say it’s non-voluntary,” Dutch Finance Minister Jan Kees de Jager said. “But this could be for a very short period of time.”
EU officials are considering a previously rejected German plan for a bond exchange after French-led efforts to shepherd banks and asset managers into a “voluntary” rollover fell short of a target of 30 billion euros.
The ECB, France and southern countries are the loudest opponents of a bond swap, fearing that it would trigger an official default that spreads turmoil through European markets.
“We need to find a way to have some guidelines today about the private-sector involvement and the solution for Greece,” Belgian Finance Minister Didier Reynders said.
Today’s meeting started with the signing of a treaty to establish the European Stability Mechanism, which will provide loans to debt-hit countries as of mid-2013 and include provisions for a private-sector role.
Euro-area governments will put 700 billion euros of cash and callable capital into the ESM, giving it the capacity to lend 500 billion euros. It requires unanimous government ratification to go into operation.
German Finance Minister Wolfgang Schaeuble ruled out a further reinforcement of the current rescue mechanism, the European Financial Stability Facility, set up in May 2010 at the height of the first phase of the crisis.
Finance ministers last month agreed to increase national guarantees to lift the EFSF’s lending ceiling to a targeted 440 billion euros. A further boost “is not at all up for discussion,” Schaeuble said.