EURO ZONE finance ministers were confronted with a new upsurge in global market tensions yesterday as they struggled late last night to settle fundamental divisions over a second Greek bailout.
With Italian and Spanish borrowing costs at their highest levels since the euro was introduced in 1999, diplomats said the ministers wanted to stage a show of unity by agreeing an outline deal on a new rescue package for Greece.
The ministers were also set to open discussions on a new range of measures to stem the debt emergency.
These include giving the euro zone bailout fund powers to buy sovereign bonds on secondary markets at face value, thereby reducing the debt burden of the issue.
The ministers remained deeply divided, however, over the scope and scale of measures to enlist private creditor participation in the effort to keep Greece afloat.
Some but not all are willing to back a German debt swap plan, which would be likely to prompt a default rating on Greek debt, something long opposed by the European Central Bank.
With ministers in open conflict as they arrived in Brussels for two days of scheduled talks, the FTSEurofirst 300 index of top European shares fell 1.5 per cent. Meanwhile, the Standard Poor’s 500 Index in the US came close to its biggest two-day drop in a month.
The volatility saw the euro decline 1.7 per cent against the US dollar to its lowest level for six months.
The interest rate on Spanish 10-year bonds rose above 6 per cent for the first time in 14 years and the interest rate on equivalent Italian bonds reached 5.58 per cent.
Euro zone finance ministers are concerned that such pressures, if not quickly brought under control, could fan a tidal wave of turmoil. The existing bailout fund would be too small to handle any Italian rescue and would be stretched to its limit by any Spanish intervention.
“I, like several of my colleagues, will be seeking to ensure that there is no contagion from the medium-term funding measures adopted to assist Greece,” said Minister for Finance Michael Noonan as he arrived in Brussels.
“I have consistently stated the need for a Europe-wide solution and not just for ad hoc country by country solutions.”
Although Mr Noonan did not specify what exactly he meant by that, he is known to favour deep cuts in the interest rate that all bailout recipients pay for their rescue loans.
The focus, however, was on Greece. Austrian finance minister Maria Fekter said the compulsory participation of bondholders would be “fatal”, but Dutch minister Jan Kees de Jager said any default rating may be for a short time only.
“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,” he said.
