Europe's debt crisis deepened as Greece struggled to complete a fifth austerity plan to keep pace with its mounting deficit, Italy faced a possible credit-rating cut and Spain's ruling party was routed in local voting.
The cost to insure Greek debt against default rose to a record and the yield on its 10-year bonds increased to a euro- era high as Prime Minister George Papandreou's government met today in Athens to endorse a new package of spending cuts and state-asset sales needed to assure the flow of bailout funds.
"The bond market is the only language policy makers will listen to," Axel Merk, chief investment officer for Merk Investments Llc said in an interview with Bloomberg Television's Betty Liu. "Once the bond markets impose austerity on the country that's when they follow through, when there is a backing off, when things are going better, that's when they lapse."
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More than a year after European policy makers approved a 750 billion-euro ($1.1 trillion) bailout blueprint to stem the sovereign crisis, bond yields in debt-laden peripheral countries are at record highs and officials are floating plans to extend Greek repayments. Hours before the May 20 S&P warning about Italy, Fitch Ratings cut Greece three levels and said it would consider an extension of maturities as a default.
The extra yield investors demand to hold Italian 10-year bonds over German bunds rose to a four-month high of 179 basis points after Standard & Poor's said it may cut the country's credit rating. Spain's yield spread rose to 251 basis points, also the highest since January, after the ruling socialists suffered their worst defeat in 30 years in local elections in a voter backlash against austerity.
European Union demands may require Greece to sell 15 billion euros of assets by the end of 2012, a year ahead of schedule, in order to win a new three-year loan package, a person familiar with the talks said today. EU Economic and Monetary Affairs Commissioner Olli Rehn said creating a vehicle to manage Greece's privatization program was being considered.
"The possibility to create a trust fund or a privatization agency is one option we're exploring among several options," Rehn told reporters in Vienna today.
The government discussed today selling stakes in Hellenic Postbank SA, and the country's ports in the first phase of the asset-sale program, said a government official. The state's direct 34 percent stake in Postbank has a market value of 275 million euros.
"With an economy still in recession, it's very difficult to keep piling on larger amounts of fiscal tightening and I think instead we are moving to an environment where asset sales are going to be used as the key means of signaling Greece's commitment here," David Mackie, London-based chief European economist at JPMorgan Chase & Co., said in a conference call today.
Greece has a "refinancing hole" of 30 billion euros for both 2012 and 2013, according to economist Nouriel Roubini. Greece could restructure by issuing debt with lower interest payments and extend maturities as it's unlikely the nation will "regain market access for the next five to 10 years," he said in an interview last week.
The demands on Greece come amid renewed pressure on Spain and Italy, in addition to Ireland and Portugal, the other two euro nations that received bailouts.
Spanish Prime Minister Jose Luis Rodriguez Zapatero's Socialist party had its worst electoral setback in local elections since the country's 1979 return to democracy as voters punished the ruling party for austerity policies. The shift in power in some key regions may spark doubts over Spain's ability to contain its deficit as newly elected officials may reveal weaker finances than their predecessors reported.
Euro-area governments also want bondholders to buy new Greek bonds to replace maturing debt, stopping short of the debt extension, or "reprofiling," floated by Luxembourg Prime Minister Jean-Claude Juncker last week, the person said.
Such a postponement of debt redemptions would be classified as a default, Fitch Ratings said last week when it cut Greece's credit rating by three levels to B+.
Pressure on peripheral bonds isn't letting up because "discussion on Greece will continue, Italy's negative outlook will reinforce risk aversion and the result of Spanish regional elections will foster speculation that the newly appointed administrations will unveil 'hidden debt,' " Luca Cazzulani, fixed income strategist at UniCredit Research, said in a note to investors.
Greek 10-year yields jumped 49 basis points to a record 17 percent as of 3 p.m. in London, while yields on two-year notes climbed 64 basis points to 26.1 percent. Irish 10-year yields advanced 29 basis points to 10.83 percent, with Italy up 4 basis points to 4.81 percent. The yield on Spain's 10-year bond rose 5 basis points to 5.53 percent.
Declines in so-called euro-region peripheral bonds have deepened amid speculation that Greece will need to restructure its debt as it struggles to avoid default. The nation's securities have lost 13 percent this year, with Portugal losing 14 percent and Ireland 7.1 percent, according to indexes from Bloomberg and the European Federation of Financial Analysts Societies.
The euro fell as much as 1.4 percent to $1.3970, weakening to less than $1.40 for the first time since March 18, and depreciated to 1.23235 Swiss francs, a record.
Bloomberg News
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