LONDON – Mounting political tensions and frustration at a lack of resolution over whether Greece will get a vital bailout rekindled fears Thursday that Europe's debt crisis could spread to other countries.
As stocks and the euro fell on Thursday, borrowing rates rose for Italy and Spain's government debt -- a sign that investors are worried that the two countries would be dragged back into a crisis that had shown some signs of easing.
Concern has crept into the markets that Greece could still be forced into a disorderly default on a vital euro14.5 billion ($19 billion) bond repayment due next month. Despite answering concerns over its commitment to tough austerity measures, the country has yet to clinch deals with its international creditors for a bailout worth euro130 billion ($170 billion) and an accompanying euro100 billion ($131 billion) debt writedown agreed with its private bondholders.
Over the past few days, fears have grown that the bailout deal may be unraveling and on Wednesday relations between Greece and its partners in the eurozone hit a new low.
Greek Finance Minister Evangelos Venizolos told the country's president, Karolos Papoulias, that there were "many in the eurozone who don't want us any more".
Meanwhile, Germany's finance minister, Wolfgang Schaeuble told German Suedwestrundfunk radio Wednesday: "They must understand in Greece that we want to do everything to help Greece -- we see the great distress that people in Greece must bear because the political class in Greece has failed over years and decades, and I am not sure even now whether all in the political parties in Greece are aware of their responsibility for the difficult situation of their country."
Investors Thursday appeared less than impressed with the clash between Greece and its European neighbors.
"Yesterday's back and forth between Greek politicians and EU policymakers had all the hallmarks of an unedifying playground spat, with accusations and insults flying thick and fast," said Michael Hewson, markets analyst at CMC Markets.
"Unfortunately there will be no winners or losers in this particular little saga as Europe gives the impression of gearing up to cut Greece loose, unless they subjugate to demands for new measures to sate various new concerns."
Several politicians -- especially in rich euro countries like Germany, the Netherlands and Finland -- have grown tired of Greece repeatedly missing budget targets and failing to implement promised cuts, reforms and sales of state assets. There are also concerns that the second, euro130 billion ($170 billion) bailout may not be enough to lift Greece out of its steep recession -- its economy shrank 7 percent in the final quarter of 2011 from a year earlier.
Jean-Claude Juncker, the Luxembourg prime minister who also heads eurozone finance meetings, promised more clarity over Greece at another meeting of European finance ministers this Monday, when he said decisions will be made.
As uncertainty lingers, investors are reassessing their assumption that Greece will get the money, prompting big market movements Thursday. While the euro slipped by 0.5 percent to below $1.30, stocks across Europe fell, with Italy's main market underperforming its peers, trading down 1.9 percent.
Meanwhile, the yield on Italy's ten-year bond has risen by 0.18 percentage points to 5.81 percent while Spain's rate has risen another 0.07 percentage points to 5.46 percent, a little down from earlier. Italy is a particular worry because it is the eurozone's third-largest economy and its debt mountain stands at around euro1.9 trillion, way more than anything Europe has committed to its bailout facilities.
Though the rates of both countries are still down from the end of last year -- when lack of confidence in Italy's ability to pay its debt saw its yields bust the 7 percent mark while Spain hovered around 6.67 per cent -- the increases have triggered concerns that Europe's debt crisis is a long way from being solved.
The pressure on the two countries had eased in recent weeks, primarily because the European Central Bank offered unlimited amounts of super-cheap long-term loans to banks.
Last week, Greece was asked to meet three sets of demands so it could get the bailout it needs to avoid a chaotic default on its debts on March 20. As well as insisting that the Greek Parliament agrees to another batch of austerity measures, the eurozone wanted clarity on a further euro325 million ($425 million) in savings and written agreements from the leaders of the Greek coalition to stick to the measures after elections scheduled for April.
Even though all three conditions appeared on Wednesday to have been met, the eurozone is still balking at finalizing the bailout, with some suggestions that money should not be handed over until after the elections.
On Wednesday evening, after a three-and-a-half-hour conference call between the 17 eurozone finance ministers, it looked as though more hurdles have been put in front of Greece.
Though Juncker said Greece had made "substantial further progress," he added that "further considerations are necessary regarding the specific mechanisms to strengthen the surveillance of program implementation and to ensure that priority is given to debt servicing."
His statement suggests that Greece's eurozone creditors may be insisting on a recent proposal by France and Germany to set up an account, separate from Greece's general budget, that would be dedicated to paying off Greece's massive debt. It was unclear whether this account would only manage the bailout money or whether government revenue could also be funneled into it.
Such an account would give the eurozone more control over what Greece does with its money, after the country has repeatedly missed budget, reform and privatization targets over the past two years. However, it could also be seen as an unprecedented interference into the fiscal affairs of a sovereign state.
The European Commission, which is in charge of economic surveillance in the European Union, is now working on a specific proposal for such an escrow account, which will be present to the ministers at a meeting on Monday.
In Athens, Venizelos said a combination of the country's written pledges, Parliament's passage of the austerity measures with a two-thirds majority and labor reform legislation were "a credible response to all those in Europe who doubt our ability to implement the program and to continue its implementation after the coming election."
There has been anger in Greece to the possibility of further restrictions on the country.
"What is happening today with Greece is unprecedented," Greek Citizens' Protection Minister Christos Papoutsis, a former European Commissioner said. "The sacrifices of the Greek people are unbearable."
"Any other new demands from our partners make a mockery of our country," he said. "It is raw blackmail of the Greek government and of the political system in Greece. It is a direct insult of Parliament, the basic pillar of Greek democracy. It is a direct insult to the dignity and the pride of the Greek people. Some in Europe forget that behind the numerical targets there are people."