* Greece may need further debt restructuring: EU officials
* Spain pays 2nd highest euro-era yield on short-term debt
* 5-year borrowing costs now above 10-yrs, sounds alarm
* Moody's warns Germany about its top-notch rating
* Spanish, German finance ministers want swift EU action
* Spanish, French finance ministers to meet on Wednesday
By Julien Toyer and Luke Baker
MADRID/BRUSSELS, July 24 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
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
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
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.
"There are certainly delays in this year's agreed programme,
and we must quickly catch up," Samaras told party colleagues.
"Let's not kid ourselves, there is still big waste in the public
sector, and it must stop."
The Spanish Treasury sold the 3 billion euros of three- and
six-month bills it was aiming to, though yields climbed; the
six-month paper jumped to 3.691 percent from 3.237 percent last
"The most important takeaway from this auction is that Spain
was able to get all its debt out the door," said Nicholas Spiro
of Spiro Sovereign Strategies. "Still, in March, Spain was able
to issue six-month debt at a yield of under 1 percent. Now it is
paying 3.7 percent."
Spain had cushioned itself by securing well over half its
annual debt needs in the first six months of the year when
market conditions were more benign, but that advantage has
evaporated as its funding needs for the rest of the year have
On Friday, the government said it expected the economy to
remain in recession well into next year, while the autonomous
region of Valencia became the first to ask Madrid for aid to pay
debt obligations it cannot meet. Others are expected to follow.
Spain's northeastern region of Catalonia, responsible for a
fifth of the country's economic output, admitted it had
financing needs to meet while its access to markets was shut,
but had not decided yet whether to tap a state liquidity line.
BOND MARKET MESSAGE
On the secondary market, Spanish five-year government bond
yields rose above 10-year yields for the first time since June
2001. Having to pay more to borrow shorter-term rather than
longer-term is usually a sign that markets think the risk of a
default or debt restructuring has increased.
"The spread between 5- and 10-years moved to negative today,
which is a classic sign that the market thinks the current
trends are unsustainable for Spain's fiscal dynamics," said Nick
Stamenkovic, bond strategist at RIA Capital Markets.
The return investors demand to hold Spanish 10-year bonds is
now at 7.6 percent, while the cost of insuring Spanish debt
against default has also hit record highs.
Ten-year yields above 7 percent have proved to be a tipping
point leading eventually to bailouts for other countries in the
euro zone, though Spanish Economy Minister Luis de Guindos
insisted on Monday that Madrid would not need more aid.
The government has already asked for up to 100 billion euros
to recapitalise the nation's banks, which have been battered by
a four year economic downturn and a property crash.
The government has launched a fresh 65 billion euro package
of tax rises and spending cuts designed to chip away at its debt
mountain but it will also probably drive the economy deeper into
The alarming spiral of Spain's debt costs has banished any
hopes that a bailout of its banks, or a June EU summit that gave
the euro zone's rescue funds a green light to intervene in the
markets, has put the debt crisis into abeyance.
Spain and Italy have called for help to ward off market
pressure. The ECB has cut interest rates but has shown marked
reluctance to revive its bond-buying programme, the only
mechanism that could lower borrowing costs at a stroke.
De Guindos and Wolfgang Schaeuble, Spain and Germany's
Finance Ministers, called on Tuesday for a quick implementation
of the decisions of the last European Union summit, particularly
setting up a banking union with a single European supervisor.
They also said after meeting in Berlin that Spain's funding
costs did not reflect the fundamentals of its economy and the
sustainability of its debt.
French Foreign Minister Laurent Fabius said further aid for
Spain could take the form of an increase in Europe's rescue fund
or action by the ECB.
"I hope it will not be necessary to intervene again," he
told France 2 television. "If we have to intervene, it could be
an increase in the firewalls ... or interventions by the central
The euro zone as a whole is now subsiding into recession.
Business surveys on Tuesday showed the currency area's
private sector shrank for a sixth month in July, with the
downturn that began in the euro zone's high debt nations now
becoming entrenched in Germany and France.
Credit ratings agency Moody's Investors Service lowered its
outlook for Germany, the Netherlands and Luxembourg to negative
from stable late on Monday, citing an increased chance that
Greece could leave the euro zone.
It also warned Germany and the other 'AAA'-rated countries
that they might have to increase support for Spain and Italy.