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EU emergency plans fail Greece

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Greek borrowing costs spiked Tuesday and an International Monetary Fund team departed for Athens amid concern that an emergency plan offered by the country’s European neighbors will not avert a crisis in the deeply indebted nation.

A further downturn in Greece could have broader ramifications for the European economy — particularly in nations such as Portugal and Spain that are struggling with rising public debt. Greece’s problems have already exacerbated strains among the 16 nations that share the euro as a currency, undermining the euro’s value and casting doubt on how far the countries will go to adopt the type of common regulations some argue are needed in the wake of the global financial crisis.

The eurozone nations two weeks ago said they would stand behind Greece with emergency loans if the country is unable to raise the money it needs in coming months to keep its government operating. The plan was designed to include a Greek appeal to the IMF.

The hope was that the pledge by neighboring nations would reassure markets and lower Greece’s borrowing costs, allowing it to raise the money it needs as officials carry out an economic restructuring plan.

But an initial Greek effort to sell bonds after the plan was announced fell short of expectations. Rates have continued rising, as has the gap between the interest rate paid by Greece and that paid by financially stable European countries such as Germany — a benchmark for whether the European effort is having the intended impact.

If that benchmark, known as a risk spread, widens, “it will be difficult for Greece” to raise the money it needs, said Mohamed El-Erian, chief executive of Pimco, a bond investment firm. “Markets are signaling skepticism.”

With Greek bond prices falling sharply on Tuesday, the IMF announced that a technical team was heading to the country for a two-week visit. While Greek and IMF officials said the mission was part of an effort that has been underway for several weeks, the announcement drew attention to the fact that the European agreement had failed to stabilize the situation.

The emergency plan “was basically an unworkable fudge — smoke and mirrors — in the hope that the markets would think some solution was in place,” said Nariman Behravesh, chief economist with the IHS Global Insight consulting firm. “Financial markets woke up to the fact that there was nothing there.”

In theory, if Greece’s borrowing costs become unworkably steep, the country would tap the European and IMF emergency program. But the European plan left unclear how much money might be available to Greece, or the terms on which it might be provided. It also gave any of the other 15 euro nations an effective veto over any loans if they did not feel Greece had followed through on plans to control spending. Germany in particular has been hesitant to offer concessions or approve any help for Greece that might be perceived as a “bailout.”

Given the uncertainty, bond rating agency Standard & Poor’s left its rating on the country unchanged after the European decision — reflecting a sense that Greece’s prospects hinged more on the government’s “political resolve” in cutting costs rather than on possible European support.

“It may be difficult for Greece’s leaders to demonstrate the political will” needed to tame debt levels projected to rise over the next two years to 133 percent of the country’s economic output, the agency said in an analysis published on Tuesday.

Officials at Greece’s Public Debt Management Agency were not available for comment.

Rising government debt among the world’s developed economies has become a growing concern, with borrowing levels at historic highs and more countries — including the United States — approaching levels that some consider unsustainable.

Source: Washington Post

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