Bloomberg News

EU Struggles to Convince on Greek Deal as Spain Sells Debt

July 19, 2011

(Updates with bond sales starting in second paragraph. For more on Europe’s debt crisis, see EXT4 <GO>.)

July 19 (Bloomberg) -- European leaders are struggling to convince investors that they will agree on a second Greek bailout at a summit this week as record bond yields boosted financing costs at sales of Spanish and Greek debt.

European Union government chiefs plan to meet for the second time in a month on July 21, aiming to break a deadlock over a new Greek rescue that has spooked investors. Spanish and Italian bond yields surged yesterday, piling pressure on officials to end the turmoil. Spain and Greece sold 6.08 billion euros ($8.6 billion) of bills today.

“As another D-day looms on Thursday, we have few soothing words,” Suki Mann, senior credit strategist at Societe Generale SA in London, wrote in a note to investors. “Greece appears beyond repair, Italy is on the brink and the chances are that the euro might be no more very soon.”

EU President Herman van Rompuy asked leaders last week to meet in Brussels to discuss “the financial stability of the euro area as a whole and the future financing of the Greek program.” Yesterday, stocks declined around the world, the euro fell and the cost of insuring European sovereign debt rose to records amid concern the euro region isn’t any closer to solving the crisis a year after Greece’s initial rescue.

The euro fell toward its lowest in a week against the dollar on concern summit leaders won’t agree on steps to contain the crisis. It traded at $1.4176 at 12:02 p.m. in Frankfurt, up 0.5 percent on the day.

German Optimism

Chancellor Angela Merkel’s chief spokesman, Steffen Seibert, said Germany is confident the summit will produce an agreement to fund another bailout for Greece, which received a 110 billion-euro rescue in May of last year from the EU and the International Monetary Fund.

“We must master this challenge,” Seibert said yesterday in Berlin. Germany is “positive that we’ll have a package for Thursday that will secure Greece’s debt sustainability in the long term,” added Finance Ministry spokesman Martin Kotthaus.

With European debt markets in turmoil before the summit, both Greece and Spain sold treasury bills today. Spain auctioned 4.45 billion euros in 1-year and 18-month bills. Greece sold 1.625 billion euros of 3-month bills.

‘Price Concession’

Yields on Spanish and Italian 10-year and Greek two-year bonds hit euro-era records yesterday. Spanish 10-year yields fell 15 basis points to 6.17 percent as of 11:09 a.m. in Rome, narrowing the spread over German bunds to 346 basis points. Greek two-year yields surged 113 basis points to 37.10 percent, while Italy’s 10-year bond yield dropped 23 basis points to 5.74 percent.

“We didn’t see a huge price concession, it was in line with the secondary market so overall it was a decent auction,” said Giuseppe Maraffino, a fixed income strategist at Barclays Capital in London. “I don’t see problems in terms of demand. The focus is at what price the Spanish and Italian Treasuries are able to issue.”

European leaders are at odds with one another and with the European Central Bank over demands by Germany and Finland that private investors bear some of the burden of a new Greek rescue. The summit also comes after European bank stress tests on July 15 failed to allay investor concern that lenders were prepared for a Greek default and that euro-area governments had the ability to bail them out.

Stress Tests

“With this week’s summit, the results of the stress tests will only be secondary,” Carsten Brzeski, an economist at ING Group in Brussels, told Owen Thomas on Bloomberg Television’s “First Look” on July 18. “Just tough talk is not sufficient any more. We really need to see a breakthrough.”

Bankia SA, the lender pursuing one of Spain’s largest initial public offerings, slashed its IPO price by as much as 26 percent to appeal to wary investors amid the debt crisis. The bank set the share price at 3.75 euros each, after originally planning to sell shares at 4.41 euros to 5.05 euros apiece, according to an e-mailed statement sent late yesterday.

A summit was originally mulled for last week before being postponed amid German fears it would backfire without a pact on private-sector involvement. Germany’s government says no extra aid is possible without bondholders staying exposed to Greek debt. By pushing for a voluntary rollover of Greek debt that risked pushing Greece into technical default, Germany also incurred the wrath of the ECB.

‘Highly Credible’

ECB President Jean-Claude Trichet told the Financial Times Deutschland in an interview published over the past weekend that Europe can surmount the crisis and the euro remains “a highly credible currency.” He reiterated that the ECB will not accept bonds from a nation that defaults as collateral.

French Finance Minister Francois Baroin said yesterday that he was “confident” an agreement on Greece would be reached at the summit that would satisfy the ECB. “We are working hard for a solution that would allow avoiding a selective default or a credit event,” Baroin told journalists in Washington.

The ECB may be willing to accept Greek bonds as collateral in the event of a short-term selective default, council member Ewald Nowotny suggested today. “There is a full range of options and definitions, from a clear-cut default, selective default, credit event and so on,” Nowotny told CNBC in an interview. “This has to be studied in a very serious way.”

Among topics for the talks is a potential overhaul of the 440 billion-euro rescue fund to enable Greece to better pay its bills. Euro-area finance chiefs last week revived the idea of allowing countries to use loans from the fund to repurchase and cancel their own debt in secondary markets.

‘Common Bond’

The fund would need to be increased to near 2 trillion euros and “and become a de facto common bond type instrument,” to solve the crisis, Royal Bank of Scotland economists including Jacques Cailloux said in a research note published on July 13.

The market rout may be convincing Germany that the ECB is right about avoiding a default event, said Marco Valli, chief euro-area economist at UniCredit SpA in Milan.

“We’re really running out of time” and Germany “will take a step back and accept that private-sector involvement will occur mostly via EFSF buybacks,” Valli added, referring to the region’s rescue fund, the European Financial Stability Facility.

--With assistance from John Glover, Gabi Thesing and Lucy Meakin in London, Tony Czuczka in Berlin, Emma Ross-Thomas in Madrid, Sandrine Rastello in Washington and Lukanyo Mnyanda in Edinburgh. Editors: Simone Meier, Fergal O’Brien

To contact the reporter on this story: Jeffrey Donovan in Rome at

To contact the editor responsible for this story: Craig Stirling at

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