The rise in Italy's borrowing costs may put in doubt its participation in the next tranche
of the Greek bailout in September, eurozone officials said.
In a conference call of eurozone finance officials on Thursday, during which the next
tranche of emergency loans for Greece was discussed, Italy said it might have to use the
"step-out» option in September if its own financing costs rise higher the those on the Greek
loans.
"They have not decided one way or another," said one euro zone source familiar with the
conference call details.
Italy's borrowing costs soared at a closely-watched bond auction on Thursday as investors
worried by the euro zone debt crisis and an impasse over the U.S. debt ceiling exacted a
high risk premium.
Under the Greek bailout agreement, a country whose borrowing costs are higher than the rate
at which the money is lent to Greece can either "step out,» and other countries add more to
compensate for its share, or it can ask for compensation from the others so as not to make a
loss.
"It is not a question that needs to be decided right now, we need to look at what the
funding costs are at the time of the disbursement -- right now it is a borderline case,» the
official, who asked not to be named said.
"This is a potential issue, not a real issue."
A second euro zone official familiar with the call confirmed the Italians were considering
not taking part in the next tranche of the Greek bailout depending on the funding costs.
Greece is to receive 5.8 billion euros ($8.3 billion) from the euro zone and 2.2 billion
euros from the International Monetary Fund in September, probably on September 15.
Euro zone leaders decided last Thursday that the next disbursement to Greece would be
handled by the European Financial Stability Facility, which was to take over from the
bilateral loans that the first Greek bailout is based on.
But a tight schedule of putting together a new financing program for Greece in time for the
disbursement made it more likely the next tranche would still be paid out through bilateral
loans before moving the financing over to the EFSF.
"The timeline is a little tight to get the next disbursement through the EFSF. The problem
is to set all the program documentation in such a way so the EFSF could do this by
mid-September," the official said. "It is more a calendar issue than anything else."
"It now seems more likely that it will be done through the bilateral facility, but since
money is fungible it does not make a difference. It would be just this one disbursement and
then it would move on to the EFSF," the official said.
To set up the EFSF's financing plan for Greece, officials need to know the size and
structure of private sector involvement in debt exchange and buyback schemes that Greece
will offer to banks by early September.
[Reuters]
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With the fate of the single currency again in the balance, EU leaders and the 17 eurozone ministers were under pressure to overcome differences over a second Greek bailout to ease a threat of contagion to its third and fourth biggest economies, Italy and Spain.
The euro fell on markets as Italian stocks plunged four per cent and borrowing costs rose to 12-year euro-era record highs in Spain and Italy.
"There are tensions across the eurozone, we must find a solution," said Belgian minister Didier Reynders on arrival.
Greece, awaiting a rescue package in September tipped almost as big as last year's €110 billion ($146 billion) bailout, issued a similar warning.
"We need today a very strong and clear message for stability, not only in Greece but in the euro zone and beyond the euro zone," said Finance Minister Evangelos Venizelos.
With tension mounting, German Chancellor Angela Merkel stepped in to issue a rare public plea to a fellow EU nation, urging the Italian parliament to pass an austerity budget to avoid it being dragged into a debt crisis that so far has hit smaller nations - Greece, Portugal and Ireland.
The three combined represent only half the size of the Italian economy.
Brussels meanwhile urged a clampdown on the world's ratings agencies, including a ban on ratings for countries covered by EU-IMF rescue packages, and possible legal action.
Internal Markets Commissioner Michel Barnier said he would ask Poland, which currently holds the rotating European Union presidency, to put action on ratings agencies to ministers soon.
"We need to examine the possibilities of smashing the rating agency oligopoly," agreed German Finance Minister Wolfgang after Moody's last week drew heavy EU fire for downgrading Portugal's rating to "junk" status just as it began to implement austerity measures.
But the Brussels talks, to be enlarged to the full EU 27 on Tuesday, will need to see Europe speaking with a single voice on the crisis to relieve pressure on fragile economies.
At stake is the prickly issue of private-sector involvement in a second bailout of Greece, a deal not expected before September.
Eurozone discord over how to bring banks and other private creditors to bear a share in a new rescue, without triggering a default which would ripple across the single currency area, has fuelled tension on nervous markets.
"Certainly we need to move as fast as possible" on details of the Greek rescue plan, said Polish Finance Minister Jan Rostowski. "It's not good to have it not finalised."
Initial French proposals for a voluntary rollover of Greek debt - buying new Greek bonds when current bonds come due - appear to have lost favour since a shock warning from Standard & Poor's ratings agency that even this soft option would be viewed as a default of Greece.
Current options include a buyback of Greek debt, a debt swap and interest cuts.
Germany, the Netherlands and others favour a solution that will force the private sector into easing the taxpayer's pain - whether or not this comes down to a default.
"Substantial private sector involvement is for the Netherlands and Germany a precondition," said Dutch Finance Minister Jan Kees de Jager.
"We did not say that it has to be mandatory," he added. "We still pursue a voluntary basis but some ratings agencies will see any substantial participation maybe as not completely voluntary."
European leaders have been working for weeks on drawing private bondholders into a Greek rescue tipped as almost as big as last year's €110 billion bailout.
The plan has the backing of key global finance group, the Institute of International Finance (IIF), which represents banks, insurers and investment funds. It held closed-door talks in Europe last week.
But the European Central Bank (ECB) is opposing any Greek default, saying this would mean it could no longer accept Greek government debt as collateral for loans to Greek banks.
That would probably cause the Greek banking sector to collapse.
AAP
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BRUSSELS (AP) -- European officials are trying to work out a strategy Monday to prevent the eurozone's debt crisis from spilling over into bigger economies such as Italy and Spain, as they discuss details of a second bailout for Greece.
Intense debate over how, and how much, banks and other private investors can contribute to a new rescue package for Greece has unsettled financial markets in the currency union, most dramatically in Italy, as rating agencies warn that even a voluntary involvement will likely be seen as a partial default of Greece on its massive debts.
Though the proposals currently doing the rounds may be less severe that a Greek payment halt, for example, Moody's said in a note Monday that the "prospect of any form of private sector participation in debt relief is obviously negative for holders of distressed sovereign debt."
Moody's warning follows a report last week from Standard & Poor's that said that even a relatively market-friendly French proposal on a voluntary rollover of Greek debt would likely trigger a "selective default" rating.
Investors are concerned that the debt crisis, which has so far been contained to the small economies of Greece, Ireland, and Portugal, could soon drag down bigger countries like highly indebted Italy and unemployment-ridden Spain. The mere size of their economies could easily overwhelm the rescue capacity of the rest of the eurozone.
The yield, or interest rate, on Spanish and Italian government bonds shot up Monday morning, in contrast to other big economies, while the euro dropped 0.6 percent to $1.412.
Yields on Spanish 10-year bonds rose from 5.7 percent at the start of trading to 5.8 percent, while the yield on Italian 10-year bonds meanwhile increased to 5.4 percent from 5.3 percent, following sharp rises on Thursday and Friday.
"The fact that contagion is spreading marks the failure of politicians to draw a line under the Euro-crisis to date," Rabobank analyst Jane Foley said. "As yields rise and debt financing costs become even more exaggerated the difficulties of containing the crisis become even bigger."
The threat of contagion and the wider financial market jitters are set to feature prominently in a meeting of eurozone finance ministers in Brussels Monday afternoon.
The ministers will debate whether a substantial contribution from banks to a second bailout is worth letting the country temporarily slip into default. However, senior eurozone officials warned that no decisions are expected Monday, with talks likely to drag into September.
To stay afloat until mid-2014, Greece will need an extra euro115 billion ($164 billion)-- on top of the euro110 billion ($157 billion) it was granted last year -- according to the European Commission, although some of the money will come from privatizations.
Frustrated with the slow progress on Greece, European Union President Herman Van Rompuy, usually in charge of the summits of EU leaders, called in top officials -- including European Central Bank President Jean-Claude Trichet, the EU's Monetary Affairs Commissioner Olli Rehn and European Commission President Jose Manuel Barroso -- for an unscheduled get-together ahead of the finance ministers meeting.
Trichet in particular has stressed the potential negative consequences of a default rating, even a temporary one.
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