January 21, 2010 / 11:20 AM / in 9 years

WRAPUP 4-Greek debt costs spike on budget jitters

* Greek/German bond spread hits widest since euro entry

* Nomura International says EU may mount rescue effort

* EU says unaware of any talks on bailout

* Prime minister says country in unprecedented crisis

* Euro slips, southern European bond spreads jump briefly

(Adds warning by think tank, final paragraphs)

By George Georgiopoulos

ATHENS, Jan 21 (Reuters) - Greece’s borrowing costs spiked on Thursday because of market jitters over its ballooning budget deficit, as the prime minister said the country faced an unprecedented crisis.

Greek government bond spreads over benchmark German Bunds, a measure of the risk which investors see in holding Greek debt, jumped to their highest level since Greece joined the euro currency area in 2001, traders said.

Spreads later fell back as some traders speculated other European Union members might come to Greece’s rescue, in order to prevent the country’s debt burden from undermining confidence in the euro zone as a whole.

“Our country is in the middle of an unprecedented crisis,” Prime Minister George Papandreou told a meeting of his ministers. His planned austerity measures to shrink the deficit face opposition from labour unions and the old guard in the ruling socialist party.

Papandreou said the government would “take all necessary measures to avoid risks”, but did not provide fresh details of the austerity plans, which have so far failed to reassure financial markets that Greece can remain creditworthy.

In an apparent reference to investors who were dumping Greek bonds, Papandreou said Greece’s economic crisis was making it the target of international profiteering.

“We also know that the situation in which our country has been brought is being exploited internationally, either on a political level or for profiteering,” he said.

MARKET TURMOIL

The euro fell near a six-month low against the dollar on Thursday, partly because of concern about Greece, while spreads jumped on the bonds of other southern European euro zone members, including Portugal and Italy. An index of Greek banking stocks slid more than 5 percent at one stage.

Some investors worry Greece’s debt crisis might conceivably force its withdrawal from the euro zone in the long term. This could fuel speculation about the financial stability of other members of the zone, and damage confidence in the euro currency.

Bond spreads later narrowed back, however, in response to a media report that EU officials were exploring the possibility of extending a loan to Greece to help it avoid default.

The loan would carry heavy conditions to ensure that Greece brought its finances under control, the weekly Brussels newspaper European Voice quoted an unnamed EU source as saying.

The spread of the 10-year Greek bond yield above Bunds, which had climbed as much as 18 basis points to a high of 312 bps in early trade, fell back to stand at 287 bps in late trade.

A European Commission spokeswoman said she was not aware of any talks about a loan to Greece, and the German Finance Ministry repeated that Greece must solve its fiscal problems through its own efforts.

Many analysts doubt the EU would come to Greece’s aid any time soon, for fear of setting a precedent that could commit the bloc’s richer members to supporting poorer ones.

Instead, the EU may continue for at least several months to press Greece to adopt stronger austerity measures, threatening the country with sanctions under EU budget rules unless it provides a convincing plan to cut its deficit.

URGENCY

But Fred Goodwin, a strategist at financial firm Nomura International, said the increasing weakness of the euro and southern European bonds in reaction to the Greek crisis might force the EU to change its strategy.

“The EU must now see the urgency of policy intervention, whatever that might be. I expect this is about to occur,” Goodwin wrote.

Greece’s finance minister insisted on Thursday that his country could ride out the fiscal storm without aid.

“We are not expecting anyone to come to our rescue. Greece has not asked for it, nor is it expecting anything of that sort,” George Papaconstantinou told a banking conference.

“We will be able to satisfy our borrowing requirements in international markets in the next weeks and months, according to the schedule we have.”

Papaconstantinou did not elaborate on how Greece would cover this year’s estimated 53 billion euros ($75 billion) in financing needs, but Spyros Papanicolau, head of the public debt agency, said it might issue dollar and yen bonds. On Wednesday, Papaconstantinou suggested Greece might even sell bonds directly to its own public.

Greece has said it intends to cut its budget deficit from 12.7 percent of gross domestic product to below 3 percent by the end of 2012. But many investors think this would require sharper cuts in public sector wages and pensions which would probably trigger strong social opposition.

“Against a backdrop of greater market sensitivity to fiscal trends on a global scale, markets will likely remain sceptical on the feasibility of the announced corrective measures until they are effectively implemented,” BNP economist Luigi Speranza said in a research note.~

Greece’s most influential think tank, IOBE, warned of a social crisis unless the government took urgent action, including unpopular austerity measures.

“Conditions require immediate action and drastic measures,” it said in an open letter to the government.

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