European crisis spreading

MILAN – A growing number of European countries are being squeezed by a financial vise just days before a Greek election that could escalate the region’s political and economic turmoil.

The rise of Italian and Spanish borrowing costs to alarming levels Thursday heaped pressure on leaders to prevent Europe’s debt crisis from engulfing its largest countries. No grand solution appears imminent.

German Chancellor Angela Merkel opposes solutions that many experts are pushing that would increase costs for Berlin.

Merkel has found herself isolated from the leaders of Spain, Italy and France, who want the 17 countries in the euro currency union to move quickly to bind their governments’ finances and debt.

Such action could take the form of jointly issued debt or Europewide guarantees on bank deposits. Either step would spread the risks that individual countries bear across the eurozone.

Italian Premier Mario Monti has agreed with French President Francois Hollande on the need for such measures. But Germany, which as Europe’s largest economy bears most of the cost of bailouts, is reluctant to expose itself even more.

The proposed steps are expected to dominate talks at next week’s summit of Group of 20 leaders in Mexico.

Compounding the debt crisis is the fear that’s gripped European banks about lending to each other – a key element of a stable banking system.

“The European banking system is paralyzed,” said Nicolas Veron, senior fellow at the Bruegel think tank in Brussels. “So many banks hold massive amounts of Spanish and Italian government bonds that are losing value. We no longer have a functioning interbank (lending) market in the eurozone.”

On Thursday, the Institute of International Finance called for some coordinated action by major central banks to address the crisis. And Britain’s Treasury chief said the government and the Bank of England will launch an emergency bank lending plan to try to ease credit. Britain isn’t in the euro currency union, but British banks have been wary of lending in part because of worries about the fate of the eurozone.

Experts warn that the need for a solution is urgent and that European leaders must signal to investors soon that a consensus is forming around some plan. They note how fast fears about Spain have spread to Italy. Matters could worsen this weekend, when Greece holds elections that could determine whether that country sticks to the terms of its bailout.

Abandoning the bailout deal would likely require Greece to leave the currency union, bringing uncertain consequences for Europe and the global economy.

“We’re at a tipping point,” said Michael Hewson, a senior analyst at CMC Markets. “You either have to deliver or disband.”

Here’s a look at the situation in individual countries:

ITALY

Investors are demanding high interest rates on bonds for fear that Italy might soon need financial aid.

The interest Italy must pay to raise $3.76 billion in three-year loans from financial markets jumped Thursday to 5.3 percent. That’s the highest rate since December. Italy also auctioned 10-year bonds at a worryingly high rate of 6.13 percent. The rates spiked after a European deal to save Spain’s banks failed this week to defuse worries about Spanish debt.

SPAIN

Spain’s troubles keep growing. A $126 billion European rescue loan for its banks was meant to help. Yet it’s raised concern that the government, which is ultimately liable for the money, will have trouble repaying it. The Moody’s ratings agency on Wednesday downgraded Spain’s sovereign debt three notches because of that. As a result, Spain’s key borrowing rate hit a fresh high Thursday.

GREECE

Greece’s national election this weekend has become the next focal point for Europe’s financial crisis. The left-wing Syriza party, which finished second in the first round of voting in May, wants to abandon the country’s international bailout terms. As a result, Greece would be cut off from loans, face bankruptcy and possibly leave the euro.

In the latest official polls, the party was essentially tied with the conservative New Democracy. Still, Greece’s stock markets soared on rumors that New Democracy would win enough votes to create a coalition and keep Greece in the eurozone. Analysts warned against taking the rumors as fact.

GERMANY

Any major steps to ease Europe’s debt crisis must meet Berlin’s approval. So far, Merkel has balked at anything that might heavily expose Germany to other countries’ financial weaknesses.

Merkel has long favored austerity as the best way for European governments to heal their public finances. But that stance is under fire, with sentiment in Europe shifting toward seeking ways to foster growth.

Merkel said Thursday that Germany is open to wide-ranging reforms – such as eurobonds or a centralized banking authority with the power to bail out banks. But she cautioned that they’re no quick fix for the crisis.