Europe again steps back from brink in debt crisis

But bigger challenges lie ahead for the euro zone and markets are already demanding more far-reaching measures to prevent a crisis that began in Greece from spreading far beyond Europe and its banks.

Germany’s Bundestag (lower house) overwhelmingly approved new powers for the 440-billion euro EFSF fund to make precautionary loans, help recapitalise banks and buy distressed countries’ bonds in the secondary market. The measure was part of a July 21 agreement by euro zone leaders meant to solve the crisis by providing a second bailout for debt-stricken Greece, partly funded by private sector bondholders, and providing more firepower to prevent contagion engulfing bigger EU economies Spain and Italy.

But that deal failed to stop Italian and Spanish borrowing costs soaring, forcing the European Central Bank to intervene in August to buy their bonds, and may yet unravel in Greece, which has fallen behind again on its deficit reduction targets, pushing it closer to default. “There is a growing realisation, even among the more reticent, that the July 21 package is yesterday’s war, and we need to go further,” a senior EU official said.

But analysts said financial markets and outside powers still want a more comprehensive response from European Union policymakers to the debt crisis. The European Commission welcomed German approval of the EFSF boost and said it was confident the ratification process would be complete throughout the 17-nation currency area by mid-October.
Despite the German vote, developments in Spain and Italy highlighted the stark challenges still facing the euro zone in coping with the sovereign debt crisis. Spain’s ruling Socialists abruptly shelved plans to boost public coffers by selling part of the state lottery for up to 9 billion euros, in the face of tough market conditions, political opposition and banks’ funding concerns.

Meanwhile, Italy had to pay the highest yield on a 10-year bond since the introduction of the euro in 1999 at an auction on Thursday, the first long-term sale since S&P’s cut the country's sovereign credit rating. Rome’s funding costs remain under pressure despite ECB bond-buying and a pick-up in risk appetite due to expectations of a stronger euro zone rescue fund.

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