SOVEREIGN DEBT WORRIES FLARE AGAIN IN EUROPE / THE NEW YORK TIMES ( VERY HIGHLY RECOMMENDED READING )

September 2, 2011

Sovereign Debt Worries Flare Again in Europe

By MATTHEW SALTMARSH AND NIKI KITSANTONIS

LONDON — Concerns about the euro zone’s ability to cohesively respond to its debt crisis resurfaced Friday after talks between Greece and its foreign creditors were interrupted and the head of the European Central Bank warned Italy to stick to its austerity program.


European stocks were sagging even before a disappointing U.S. jobs report added to concerns about the global economy, dragged lower by those companies most tied to growth like car makers, banks and insurers.


Yields on 10-year Italian bonds rose almost a tenth of a percentage point to 5.21 percent — well above the 5 percent level that is considered to be the top rate desired by policy makers.


The yield on Spain’s 10-year securities climbed slightly to 5.06 percent, despite passage in the lower house of the Spanish Parliament on Friday of an amendment that will enshrine stricter budgetary discipline in the Constitution.


The E.C.B. on Aug. 8 began the extraordinary step of buying Italian and Spanish debt to help calm markets after 10-year rates had spiked to around the 6 percent level.


David Schnautz, interest rate strategist at Commerzbank in London, said many investors had chosen to use the E.C.B.’s recent bond buying program to offload those bonds, and that was causing yields to drift up now.


“There’s still no genuine investor demand for Spanish and Italian government bonds,” he said.


Sentiment was hit after the team of European and International Monetary Fund officials pulled out of Athens early as they apparently disagreed over the country’s deficit figures and how to make up for a growing budget shortfall.


The mission had been sent to determine whether Greece would meet the conditions for the next tranche of emergency loans, due in September.


The representatives of the European Commission, the European Central Bank and the I.M.F. said in a statement that “good progress” had been made, but that they wanted to allow time for the Greek government to complete technical work on the 2012 budget and reforms.


The delegates, who had been scheduled to leave next week, said they would return to Athens by mid-September, “when we expect the Greek authorities to have completed the technical work, to continue discussions on policies needed to complete the review.”


An initial loan package, agreed to last year, has since been supplemented by a second bailout deal that was hammered out in Brussels in July, but which now hangs in the balance amid demands by some euro zone countries for guarantees from Greece in the form of collateral. Without that fresh aid, Athens could default on its obligations.


The Greek Finance Minister Evangelos Venizelos denied that there was a rift with the auditors over the country’s ability to meet deficit reduction targets set by the foreign creditors.


The minister said at a news conference that talks were continuing with auditors in “a very friendly and constructive climate,” and that he expected the team back on Sept. 14 for a second phase once Athens had finalized a draft of the national budget for 2012.


Greek officials had not previously suggested that there would be a break in negotiations with the inspectors, whose previous audits have lasted two weeks.


One issue that dominated talks, which concluded in the early hours of Friday morning, was a deeper-than-expected recession in Greece that would necessitate “some additional elaboration to ensure there is no divergence” from deficit reduction targets, Mr. Venizelos said.


A European official, speaking on condition of anonymity because the talks were confidential, said that without additional information, there was a risk that some euro zone countries might not agree to releasing the next tranche.


Mr. Venizelos also said that Greece’s economy was expected to contract by “up to 5 percent” but would not give a figure for the Greek budget deficit, broadly expected to overshoot a deficit target of 7.6 percent for 2011 by up to one percentage point.


Analysts said the government’s procrastination in implementing tough measures — like a crackdown on tax evasion and an ambitious privatization scheme — could cost the country dearly.


Moses Sidiropoulos, economics professor at Thessaloniki’s Aristotle University, told the private television channel Skai that Greece’s future in the euro zone was at stake.


“If immediate action isn’t taken, even one thing, an example to the foreign creditors that we are serious, I fear Greece will soon be featured in textbooks as a paradox of economic management,” he said.


Greek two-year note yields climbed Friday as much as 358 basis points to reach a euro-era record 46.51 percent, according to Bloomberg News.


Separately, Jean-Claude Trichet, the E.C.B. president, said that Italy’s struggling center-right government must deliver on its promised austerity package, adding to pressure on Prime Minister Silvio Berlusconi.


The bank’s support is vital because it has been buying Italian bonds to keep yields low enough for Rome to continue borrowing from investors. There are no fresh Italian bond sales planned for two weeks.


Mr Trichet said in an interview with Italian business daily Il Sole 24 Ore that measures announced on Aug. 5 by Mr. Berlusconi to balance the budget by 2013, were “extremely important.” Subsequent to that announcement, Mr. Berlusconi has appeared to row back on some of his initial commitments.


In Spain, the constitutional amendment, which was proposed last week by Prime Minister José Luis Rodríguez Zapatero, is next expected to be endorsed by senators from the upper house next week.


José Blanco, one of Mr Zapatero’s senior ministers and the government spokesman, said that the inclusion of a “principle of budget stability” in the constitution should help Spain confront further market pressure, following a month of August when investors raised the country’s borrowing costs close to record highs.


“We need to do everything possible to protect ourselves against months as difficult as was August,” Mr Blanco said at a news conference after Friday’s parliamentary vote.


Mr Blanco also argued that the constitutional reform, which Mr Zapatero proposed under pressure from Germany and France, would now put Spain at the forefront of countries that are “betting on European economic governance.”


Lawmakers approved the amendment by 316 votes in favor and five against. Still, several lawmakers from smaller parties abstained from Friday’s vote, mostly in protest against the fast-tracking of the constitutional change.


Trade unions as well as some citizens’ groups have also called for a referendum to be held before modifying the constitution that Spain adopted after returning to democracy in the late 1970s.


The outcome of the parliamentary vote was expected following an earlier agreement between Mr Zapatero and Mariano Rajoy, the leader of the Popular Party, the main center-right opposition. On Friday, Mr Rajoy said that the constitutional reform was “what everybody has been asking for” and would help put Spain on the path toward economic recovery.


Still, the latest employment date released on Friday underlined the severity of Spain’s economic crisis, with a rise of 1.25 percent in joblessness in August compared to July, leaving a total of 4.13 million unemployed.


Niki Kitsantonis reported from Athens. Raphael Minder contributed reporting from Madrid.