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Originally published Monday, April 18, 2011 at 4:12 AM

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Greek debt crisis haunts markets again

Europe's debt crisis returned to haunt markets Monday as investors fretted over a possible Greek default and the impact of huge gains for a nationalist party in Finland.

AP Business Writer


Europe's debt crisis returned to haunt markets Monday as investors fretted over a possible Greek default and the impact of huge gains for a nationalist party in Finland.

Portugal also began discussions on a financial bailout and Spain had to pay a much higher interest rates to tap bond investors.

Although borrowing costs for countries like Greece, Ireland and Portugal have risen sharply higher in recent weeks, the euro managed to brush off debt crisis concerns, hitting a 15-month high last week above $1.45. The currency has been buoyed by predictions that the European Central Bank will follow April's first interest rate hike in nearly three years with more policy tightening.

That benefits the euro if investors don't expect others, such as the Federal Reserve, to do the same.

However, there was little respite for the currency Monday in a stream of negative developments, which sent the euro down 1.3 percent to $1.4222. Earlier it had dropped to $1.4157, its lowest level since April 5.

Further debt jitters emerged with the news that Spain had to pay sharply higher interest rates to raise euro4.7 billion ($6.7 billion) in short-term debt, while the yield on Greece's 10-year bonds spiked nearly a whole percentage point at one stage to 14.59 percent. That's the first time it's gone above 14 percent since the country took up the euro in 2001.

By the close, the yield had eased slightly to 14.55 percent, but the difference with benchmark German bunds was over 11 percent - a staggering differential given that the two countries use the same currency.

The renewed focus on Greece's debts has come after some suggestions that the country would be better off looking for a way to renegotiate its debts.

Costas Simitis, Greece's Socialist premier from 1996-2004, has backed calls for the country to deal with its debt mountain, arguing that a protracted austerity program may not work. A negotiated restructuring would be better, allowing Greece to rebuild its economy over the next 15 to 20 years, he argued.

He's not the only one arguing for a restructuring but the Greek government insists that is not on the agenda, as it would make it more difficult to tap bond markets in the future.

The governor of Greece's central bank weighed in Monday, arguing that a restructuring is "unnecessary and undesirable." However, central banker George Provopoulos admitted that cost-cutting reforms by Greece's Socialist government were showing signs of "fatigue" and required a "powerful restart" to keep the program on track.

Whether Greece can actually withstand the pressure is another matter - after all, it spent the early part of 2010 insisting it didn't need a bailout. By May, it had to accept a euro110 billion ($159 billion) package of rescue loans from its partners in the European Union and the International Monetary Fund.


"Despite public protestations to the contrary, the background chatter has reached such an intensity in recent days that the real questions now seem to be rather more when a Greek 'restructuring' will finally be announced and quite what the details will be rather than if there will be one," said Simon Derrick, a senior analyst at The Bank of New York Mellon.

Although a restructuring would reduce the debt pile and possibly bring a quicker end to the painful austerity measures, restructuring would not be easy and would entail huge costs to Greece's future ability to borrow money as well as risking a massive blow to the country's banks, which are big holders of Greek bonds.

Many German and French banks are also big holders of Greek debt.

A Greek default could also trigger fears that Ireland or Portugal may seek a similar way out from their debt stranglehold. There had been hopes that Europe had finally done enough to ringfence its three weakest members, but those nations' immediate economic prospects look bleak as they try to meet their obligations for the international financial support.

Portugal began its quest for financial assistance Monday with the finance minister of the country's caretaker government meeting delegations from the European Commission, the European Central Bank and the International Monetary Fund. A key topic is expected to center on the interest rate charged for Portugal's expected euro80 billion ($116 billion) bailout.

Meanwhile, news that a euroskeptic party made big gains in Finland's election Sunday has stoked fears that the EU's "comprehensive plan" to deal with the debt crisis may not run as smoothly as hoped.

True Finns leader Timo Soini suggested Monday that Finland should opt out of future bailout packages, decisions that require unanimity in the 17-member eurozone.

A bailout rescue without Finland would severely undermine the eurozone's pledge to do everything to defend the common currency and could create panic on financial markets.

"The EU currently requires unanimous approval for each use of the eurozone bailout fund, so it is now being forced to examine ways to push through the Portuguese package without Finnish support," said Jane Foley, an analyst at Rabobank International. "There is no time to lose since Portugal is facing a hefty bond redemption in June."


Derek Gatopoulos in Athens, Daniel Woolls in Madrid and Matti Huuhtanen in Helsinki contributed to this story.

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