The rise in Italy’s borrowing costs may put in doubt its participation in the next tranche of the Greek bailout in September, eurozone officials said.
In a conference call of eurozone finance officials on Thursday, during which the next tranche of emergency loans for Greece was discussed, Italy said it might have to use the «step-out» option in September if its own financing costs rise higher the those on the Greek loans.
“They have not decided one way or another,» said one euro zone source familiar with the conference call details.
Italy’s borrowing costs soared at a closely-watched bond auction on Thursday as investors worried by the euro zone debt crisis and an impasse over the U.S. debt ceiling exacted a high risk premium.
Under the Greek bailout agreement, a country whose borrowing costs are higher than the rate at which the money is lent to Greece can either «step out,» and other countries add more to compensate for its share, or it can ask for compensation from the others so as not to make a loss.
“It is not a question that needs to be decided right now, we need to look at what the funding costs are at the time of the disbursement — right now it is a borderline case,» the official, who asked not to be named said.
“This is a potential issue, not a real issue.”
A second euro zone official familiar with the call confirmed the Italians were considering not taking part in the next tranche of the Greek bailout depending on the funding costs.
Greece is to receive 5.8 billion euros ($8.3 billion) from the euro zone and 2.2 billion euros from the International Monetary Fund in September, probably on September 15.
Euro zone leaders decided last Thursday that the next disbursement to Greece would be handled by the European Financial Stability Facility, which was to take over from the bilateral loans that the first Greek bailout is based on.
But a tight schedule of putting together a new financing program for Greece in time for the disbursement made it more likely the next tranche would still be paid out through bilateral loans before moving the financing over to the EFSF.
“The timeline is a little tight to get the next disbursement through the EFSF. The problem is to set all the program documentation in such a way so the EFSF could do this by mid-September,» the official said. «It is more a calendar issue than anything else.”
“It now seems more likely that it will be done through the bilateral facility, but since money is fungible it does not make a difference. It would be just this one disbursement and then it would move on to the EFSF,» the official said.
To set up the EFSF’s financing plan for Greece, officials need to know the size and structure of private sector involvement in debt exchange and buyback schemes that Greece will offer to banks by early September.