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Germany, France Signal Greek Support as Spain Sells Bonds

September 15, 2011

(Adds Spanish bond sale from first paragraph.)

Sept. 15 (Bloomberg) -- Germany and France signaled they’re ready to keep supporting Greece as finance ministers prepare for a new round of crisis talks and Spain sold almost 4 billion euros ($5.5 billion) in bonds.

Global stocks rebounded after Chancellor Angela Merkel and President Nicolas Sarkozy said late yesterday that they’re “convinced” Greece will stay in the euro area. With global policy makers urging Europe to step up its crisis fight, officials meet in Wroclaw, Poland, tomorrow to discuss how they will implement the expansion of the euro region’s new bailout fund. European Central Bank President Jean-Claude Trichet will give a speech at 8 p.m. in Poland.

Investor skittishness over the spread of Europe’s debt crisis has raised banks’ funding costs and roiled markets worldwide. As European governments try to ratify a July 21 agreement to bolster the euro region’s bailout fund and extend a second rescue to Greece, traders are concerned that Italy and Spain will be the next countries to get into trouble.

With markets as fragile as on the eve of the financial crisis three years ago, Merkel and Sarkozy “had little choice” other than to back Greece, said Jim Reid, a strategist at Deutsche Bank AG in London. “The challenges will continue to mount for Greece and for Europe in the weeks ahead, but this reduces the immediate risk of a financial disaster.”

Growth Slowing

The market turmoil being caused by the debt crisis is weighing on the real economy, the European Commission said today in Brussels. The EU cut its forecast for economic growth to 0.2 percent for the third quarter and 0.1 percent for the final three months, from a March estimate of 0.4 percent for both periods.

The Spanish bond due Oct. 31, 2020 was sold to yield 5.156 percent, compared with 5.2 percent when it was last sold on Feb. 17. The yield on its 10-year bond rose 5 basis points to 5.41 percent, 350 basis points more than German bunds.

Italy saw its financing costs jump at a bond auction two days ago. The extra yield that investors demand to hold Italian 10-year bonds over German bunds closed at a euro-era high on Sept. 13 of 392 basis points, or 3.92 percentage points. It was at 371 basis points today.

The euro climbed 0.1 percent to $1.3767 at 11:04 a.m. in Berlin and the Euro Stoxx 50 Index added 1.4 percent.

Split on Greece

Europe’s crisis has worsened as leaders split on how to deal with Greece. Chinese Premier Wen Jiabao yesterday called on other countries to “put their houses in order” and Timothy F. Geithner will tomorrow become the first U.S. Treasury Secretary to attend a European finance ministers’ summit.

Underscoring divisions in Europe, European Commission President Jose Barroso said he was close to proposing options on joint euro-area bond sales, putting officials in Brussels on a collision course with Germany over steps to contain the sovereign debt crisis.

“The commission will soon present options for the introduction of euro bonds,” Barroso told the European Parliament yesterday in Strasbourg, France, prompting applause from lawmakers who have backed the idea and a swift rejection from officials in Berlin. “Some of these options could be implemented within the terms of the current treaty; others would require treaty change.”

Conference Call

In the three-way telephone call, Papandreou committed to enacting policies demanded by the EU and International Monetary Fund to keep the bailout money flowing. Sarkozy and Merkel “are convinced that the future of Greece is in the euro zone,” the French statement said.

“I am skeptical that this will help to reassure markets,” said Tullia Bucco, an economist at UniCredit Global Research in Milan. “The road to the implementation of the second aid package is still quite long and may prove bumpy.”

The Greek Cabinet this month endorsed measures to help meet deficit targets of 17.1 billion euros in 2011 and 14.9 billion euros in 2012, covering a 2 billion-euro shortfall for this year that has been exacerbated by a deepening recession.

The fulfillment of Greece’s adjustment program is “more than ever” essential and is a condition for the payment of further aid tranches, Merkel said in the call, according to an e-mailed statement from her chief spokesman, Steffen Seibert.

Papandreou said Sept. 10 that the government’s top priority is “to save the country from bankruptcy” and said he would do whatever is necessary to meet targets.

Austerity ‘Indispensable’

Putting austerity programs into place “is indispensable to establish sustainable and balanced growth in Greece,” according to the statement issued in Paris. “The success of the Greek plan will provide stability to the euro zone.”

While the ECB is currently leading the euro region’s crisis strategy as it buys the bonds from Ireland to Spain and Italy, euro governments want to expand the powers of their bailout fund, the European Financial Stability Facility Fund.

Its chief financial officer, Christophe Frankel, said in Singapore today that parliaments may approve it by early October. The EFSF probably won’t issue long-term bonds before the first week of October, and market conditions will be a determinant, he told reporters.

--With assistance from Natalie Weeks, Maria Petrakis and Eleni Chrepa in Athens, Catarina Saraiva in New York, Jeff Black in Frankfurt and Daniel Tilles in London. Editors: John Fraher, Alan Crawford

To contact the reporters on this story: Helene Fouquet in Paris at; Angeline Benoit in Madrid at

To contact the editors responsible for this story: James Hertling at; Craig Stirling at

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