Europe was plunged into fresh market turmoil as this week’s visit by Greece’s creditors rekindled concern the currency union will splinter and the first call for bailout aid by a Spanish region caused borrowing costs to surge.
Stocks and the euro fell before the arrival in Athens tomorrow of Greece’s troika of international creditors -- the European Commission, the European Central Bank and the International Monetary Fund. In Spain, Catalonia joined a list of the country’s regions that may tap aid from the central government in Madrid, spurring Spanish 10-year yields to surge above 7.5 percent for the first time.
“The problem in the region is profound, but the pace that it has been dealt with was slow,” said John Stopford, head of fixed income at Investec Asset Management, which oversees $98 billion. “The bank bailout for Spain is far from sufficient to deal with the country’s problems.”
After euro finance ministers failed to staunch a decline in the single currency with the approval of a 100 billion-euro ($122 billion) aid package for Spanish banks last week, the troika will seek to determine the fiscal state of the nation where the crisis began almost three years ago. Greek Prime Minister Antonis Samaras yesterday compared his economy after five years of contraction to the Great Depression of the 1930s.
The euro slipped below its lifetime average against the U.S. dollar and to the lowest level in more than 11 years against the yen today, dropping to $1.2082 at 9:54 a.m. in Frankfurt. Spain’s 10-year bond yields rose to 7.57 percent.
The Stoxx Europe 600 Index dropped 1.9 percent at 10:36 a.m. in London.
The slump has been compounded as Spanish Prime Minister Mariano Rajoy confronts 15 billion euros of debt redemptions in Spain’s regions in the second half of this year. In addition to Catalonia, Spain’s most indebted region, Castilla-La-Mancha, Murcia, the Canary Islands and the Balearic Islands may follow Valencia in seeking aid from Madrid, El Pais newspaper reported.
Spain’s Economy Minister Luis de Guindos will visit Berlin tomorrow for talks with German Finance Minister Wolfgang Schaeuble, the German government said today. No press conference is planned.
Italian Prime Minister Mario Monti, his country also burdened under surging borrowing costs, said last week that unrest in Spain, where protesters derided the country’s new 65 billion-euro austerity package, added to euro concerns.
In Greece, troika officials will face down doubts that the country can meet its bailout commitments and reluctance among euro states to put up more funds should it fail. German coalition politicians over the weekend torpedoed the possibility of renegotiating the terms of Greece’s agreement.
“If Greece doesn’t fulfill those conditions, then there can be no more payments,” German Vice Chancellor Philipp Roesler told broadcaster ARD yesterday, adding that he is “very skeptical” Greece can be rescued and that the prospect of its exit from the monetary union “has long ago lost its terror.”
The Greek government has struggled to stand by obligations tied to 240 billion euros of rescue funding over the past two years. The country is clamoring for more help as efforts to reduce its debt to 120 percent of gross domestic product by 2020 fall short.
The IMF, which indicated in March it won’t commit more money to Greece, will make a decision on its next disbursement in late August at the earliest based on the troika’s findings, said two fund officials familiar with the situation in recent days.
The Washington-based IMF has signaled to European officials that it will stop paying further rescue aid to Greece, bringing the country closer to insolvency in September, Der Spiegel magazine cited unidentified European Union officials as saying in this week’s edition, published yesterday. It’s “already clear” to the troika that Greece won’t reach the 120 percent target, Spiegel said.
Missing the targets means Greece would need between 10 billion euros and 50 billion euros in additional aid, a potential outcome that the IMF and several unidentified euro-area states are not prepared to accept, Spiegel said.
Five years of recession “bring about bitter memories of the Great Depression in the United States,” Samaras said yesterday in comments to visiting former U.S. President Bill Clinton in Athens. “This is exactly what we are going through in Greece. It is our version of the Great Depression.”
Samaras’s three-way coalition, formed last month after a June 17 election that ended a six-week political deadlock, has scrambled to assemble budget cuts to persuade troika officials to keep aid money flowing.
Greece is due to make a 3.1 billion-euro bond payment, mostly to the ECB, in August, a challenge that euro-area officials have said won’t be an issue, while so far declining to specify how they’ll ensure the bond redemption gets paid.
Once taboo, the possibility that Greece could exit the 17-member monetary union has been voiced this year by European officials who consider the fallout from such a scenario would be the lesser evil against a seemingly perpetual crisis.
Roesler, who is Germany’s economy minister as well as the chairman of Merkel’s Free Democratic coalition partner, told ARD that a curtailment of aid to Greece would lead to a sovereign default, which would in turn lead to “Greeks coming to the conclusion that it is probably wiser to leave the euro area.”
Spiegel reported that German officials were holding off on such a decision until the permanent bailout fund, the European Stability Mechanism, comes into operation in September. The 500 billion-euro ESM is on hold pending a decision by Germany’s Federal Constitutional Court, set for Sept. 12.
“For Greece, it’s long been five past midnight,” political columnist Hugo Mueller-Vogg said in Germany’s best-selling Bild newspaper today. The IMF, “by stepping on the brakes, makes it easier for creditor nations like Germany and the EU as a whole to also say: adieu Acropolis, it’s time to go.”