Spain feels debt heat, Greece way off bailout terms

Tue Jul 24, 2012 3:54pm EDT
 
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By Julien Toyer and Luke Baker

MADRID/BRUSSELS (Reuters) - Spain paid the second highest yield on short-term debt since the birth of the euro at an auction on Tuesday, and EU officials said Greece had little hope of meeting the terms of its bailout, casting fresh doubt on its future in the euro zone.

Spain's increasingly desperate struggle to put its finances right has seen its borrowing costs soar to levels that are not manageable indefinitely, reflecting a growing belief that it will need a sovereign bailout that the euro zone can barely afford.

It has become the recent focus for investors, but Greece - where the sovereign debt crisis began - remains a powder keg. If Athens were to default or exit the euro zone, the knock-on effects could push Spain and even Italy over the edge.

With inspectors from the EU, European Central Bank and International Monetary Fund returning to Greece to decide whether to keep it hooked up to a 130-billion-euro lifeline or let it go bust, three EU officials said they were likely to conclude Athens cannot repay what it owes, making a further debt restructuring necessary.

This time, the European Central Bank and euro zone governments would likely have to take a hit on some of the estimated 200 billion euros ($240 billion) of Greek government debt they own if Athens is to be put back on a sustainable footing.

But there is no willingness among member states or the ECB to take such dramatic action at this stage.

"Greece is hugely off track," one of the officials told Reuters, speaking on condition of anonymity. "The debt-sustainability analysis will be pretty terrible."

Prime Minister Antonis Samaras said Greece's economy could contract by more than 7 percent this year, pushing debt-cutting targets further out of reach, but he pledged to stay the course.   Continued...

 
Public health workers take part in a protest against government austerity measures in Madrid July 24, 2012. REUTERS/Juan Medina