European finance chiefs clashed on Monday over how to dig Greece out of its financial hole just as markets battered the bonds of Spain and Italy, opening a new front in the debt crisis.
Finance ministers weighed how to get private bondholders to maintain their exposure to Greek debt in a way that doesn?t prompt credit-rating companies to declare a formal default.
Forcing bondholders to chip in would be ?fatal,? Austrian Finance Minister Maria Fekter told reporters before a crisis meeting in Brussels. ?We will now in the eurogroup discuss the proposals on the table and their impact with respect to a Greek insolvency or classification as an insolvency.?
Bonds of debt-strapped countries plunged, the euro sank and stocks dropped amid concern that European governments are powerless to prevent the financial distress spreading from Greece. Italy?s effort to build a firewall against the spreading crisis formed the backdrop to today?s meeting of finance ministers that will consider a new package for Greece on top of the 110 billion euros pledged last year.
Italy, struggling with Europe?s second-highest debt load after Greece, curbed short selling as its 10-year bond spread over Germany surged to 305 basis points, a euro-era high. The extra yield, a sign of investors? doubts about Italy, more than doubled from its 2011 low of 122 basis points on April 12.
Greece?s uphill struggle for solvency was dramatized by data showing the central government?s deficit widened 28 percent in the first half of 2011, with spending surpassing targets and revenue falling short.
Greece?s next package hinges on the EU finding a formula for getting investors to roll over Greek debt holdings so that governments don?t have to pick up the tab when bonds come due between 2012 and 2014.
?Some rating agencies say it?s very difficult to have a plan that is completely voluntary and that even if the scheme is on a voluntary basis some agencies will say it?s non- voluntary,? Dutch Finance Minister Jan Kees de Jager said. ?But this could be for a very short period of time.?
EU officials are considering a previously rejected German plan for a bond exchange after French-led efforts to shepherd banks and asset managers into a ?voluntary? rollover fell short of a target of 30 billion euros.