Euro zone hit by Greek debt fears, aid backlash

(Reuters) - Spain attracted solid demand in a bond sale on Wednesday, easing concerns it could be swept up by euro zone contagion, but worries about Greek debt continued to haunt the bloc, slamming bank stocks in Athens.

A Reuters poll showed an overwhelming majority of economists believe Greece will eventually have to restructure its 325 billion euro ($468 billion) debt mountain, although most said it would not happen for at least a year.

In a reminder of the rising political hurdles to solving the euro zone’s debt crisis, a member of German Chancellor Angela Merkel’s party said he would try to block plans for a new financial safety net for the 17-nation currency area.

That threat came days after the anti-euro True Finns party scored strong gains in a Finnish election, stoking fears about a veto of Portugal’s pending bailout.

The leader of the Finnish party Timo Soini said on Wednesday that finance ministers could discuss an “entirely different” solution to the crisis at a meeting in mid-May where the Portuguese rescue is expected to be approved.

Rising expectations that Greece will have to restructure a debt load that is one-and-a-half times its annual output -- similar to that of Zimbabwe -- have shaken the nervous calm that had descended on euro markets in early 2011 and raised doubts about whether leaders can restore confidence in their bold 12-year-old currency experiment.

Greek Finance Minister George Papaconstantinou reiterated on Wednesday that Athens had no plans to restructure, saying such a step would bring “extreme dangers for the Greek economy, the banking system, businesses and households.”

Athanasios Orphanides, a Cypriot who sits on the governing council of the European Central Bank, told Reuters that a restructuring would be damaging to Greece and the broader euro area.

His colleagues at the ECB have warned such a step could have the same devastating effects as the 2008 decision to let U.S. investment bank Lehman Brothers go bankrupt, but German officials have made clear they believe some form of restructuring is unavoidable.

Greek bank stocks fell more than 4 percent on Wednesday on rumours that a restructuring could come soon and the cost of insuring Greek five-year government debt shot up to a record high on worries Athens could end up forcing “haircuts”, or losses, on the holders of its debt to reduce its burden.

SPANISH DEBT

Madrid’s debt sale temporarily alleviated another of European leaders’ worst fears -- that Spain, with an economy roughly twice as big as those of Greece, Ireland and Portugal combined, could become the next target for investors, stretching the bloc’s rescue funds to breaking point.

Spain’s Treasury sold 3.4 billion euros of bonds maturing in 2021 and 2024, near the top end of its target range.

Average yields on the 10-year bond rose to 5.472 percent from 5.162 percent in the last auction, reflecting recent Greek restructuring jitters. But demand was solid, outstripping what was on offer by 2.1 times.

“All in all, relatively reassuring results providing no indication Spain’s decoupling from the periphery is under immediate threat,” said Richard McGuire, a rate strategist at Rabobank. “That said, the risk of contagion has certainly not been taken off the table.”

The Spanish auction, and expectations of further interest rate hikes from the ECB, pushed the euro up to a 15-month high against the dollar. Euro debt markets remained under pressure, however, with Portuguese 10-year yields hitting a record high above 9.5 percent.

Adding to worries about debt sustainability in Greece are signs that a growing share of the currency bloc’s 330 million citizens have reached the limits of what they will accept from their leaders in the name of preserving euro zone stability.

Opposition to further aid is particularly acute in northern Europe, where many taxpayers are furious at the prospect of helping southern countries that mismanaged their economies and finances for years.

GERMAN ESM THREAT

In an interview with the Mitteldeutsche Zeitung newspaper published on Wednesday, a budget policy expert who represents Merkel’s Christian Democrats (CDU) in the German parliament, vowed to vote against plans to create a new 500 billion euro rescue fund -- the European Stability Mechanism -- from 2013.

Klaus-Peter Willsch said dozens of his fellow deputies shared his views and held out hope that they could block the fund when it goes before the Bundestag later this year. “We’re on a slippery slope and we’ll be slipping further and further if we don’t stop this process,” Willsch said.

Reflecting the nerves in Berlin over the euro zone’s new crisis-fighting measures, a letter obtained by Reuters showed the issue had driven a wedge between the Economy and Finance ministries, who are led by members of different parties within Merkel’s coalition.

The True Finns party scored big gains in an election in Finland on Sunday and immediately vowed to block a looming bailout for Portugal, although the chances of that seem slim.

The surge in public anger at bailouts has put European leaders in a difficult position.

To avoid a near-term restructuring of Greek debt, Athens is likely to require more help from its European partners. Politicians like Merkel may find it difficult to approve that aid if their citizens are clearly against it.