Greece's borrowing costs spiked to a record high Thursday, intensifying the country's debt crisis and suggesting a euro zone and International Monetary Fund rescue plan is providing little support for Athens' struggle to avoid default.
The higher interest rates demanded by bond investors are potential poison for the Greek budget; unless they fall, the government will pay a massive premium to borrow and face a vicious cycle where higher borrowing costs fuel fresh default fears.
A Greek default would be a further blow to confidence in the shared euro currency, which has already fallen against the dollar as the crisis has escalated.
But Finance Minister George Papaconstantinou said Greece's program to pull out of a crisis that has markets speculating the country may default would work, and European Central Bank president Jean-Claude Trichet insisted that default was "not an issue" for the country.
The Socialist government, elected in October, has announced a harsh austerity program that includes cuts in civil servants' pay, pension freezes and higher taxes, and insists it will bring its deficit down to 8.7 percent of gross domestic product by the end of the year, from a revised projection of 12.9 percent at the end of 2009.
However, the high interest rate gap, or spread, between Greek 10-year government bonds and the German equivalent, considered a benchmark of stability, show markets are unconvinced that Greece can pull it off.
Spreads that began the day at the already high figure of 401 basis points — which translates into an interest rate of 4.01 percentage points higher than German bonds — spiked to 448 basis points in the early afternoon, the highest level since Greece joined the euro in 2001. (One basis point is equivalent to 0.01%, or one-hundredth of a percentage point.)
Still, Trichet expressed confidence that Greece's plan would work, and said the euro zone and IMF support plan announced last month in Brussels was "a workable framework" and "a very, very serious commitment."
"I would say that taking all the information I have, default is not an issue for Greece," he told a news conference in Frankfurt.
In Athens, Papaconstantinou said Greece's first quarter budget deficit figures were on target, with the January-March shortfall declining by 40 percent to 4.3 billion euros ($5.72 billion) from 7.1 billion euros in the first quarter last year.
Speaking in Parliament, the minister said the fall came before additional austerity measures announced March 3 took full effect.
"I reiterate emphatically that the country continues and will continue to borrow normally," he said. "We have a plan and the budget is being implemented properly and remains within its targets."
Papaconstantinou met Wednesday with a delegation of IMF inspectors to seek advice on how to speed up fiscal reforms.
But the massive spike in interest rates shows markets are still concerned and some analysts are saying a bailout or default is a matter of time.
"There can now be little doubt that Greece will have to turn to the IMF for help," said UBS currency strategist Beat Siegenthaler. With bond yields high and reports of depositors moving money out of Greek banks, "time could quickly run out," he said.
Bank of Greece figures show that in January and February, Greek corporations and households withdrew some 8.46 billion euros ($11.25 billion) in deposits, leaving the total at 229.5 billion euros ($305.14 billion) — slightly more than in February 2009.
But a central bank official said the trend was changing.
"In the past two or three weeks this tendency has been reversed ... and deposits have not been withdrawn," the official said, speaking on condition of anonymity in line with bank policy.
Under the vaguely-worded rescue plan, euro zone leaders pledged to provide support with bilateral loans and IMF funds to prevent a default and protect the euro. The loans would only come with unanimous approval of all 16 euro zone members — including Germany, which has been reluctant to bail out Greece — and only as a last resort.
European officials are reluctant to give much detail on the bailout loans.
The euro zone nations also have made no decision on what interest rate they would charge Greece for individual loans from each country, saying that they will calculate the rate only when Greece requests aid.
In a March statement, euro zone leaders said interest rates could not be a form of subsidy and would have to be higher than the average charged for all euro nations "to set incentives to return to market financing as soon as possible."
Athens has repeatedly said it hopes never to have to use the plan, saying its existence should help restore market confidence and so reduce borrowing costs.
"We do not require the activation or further detailing of any mechanism," government spokesman Giorgos Petalotis said.
"We wanted and still want this mechanism for one specific reason: to act as a guarantee to normalize borrowing conditions. So there is no reason to take any initiative at this point."
Deputy Finance Minister Philipos Sachinidis said the interest rate gap between Greek and German bonds would remain high "for as long as Greece continues to suffer from a credibility deficit."
But he expressed confidence that markets would respond well as the country met its targets.
"As we get results ... and meet our commitments to bring the deficit down to at least 8.7 percent in the first year and below 3 percent within the three-year period, then I assure you the markets will respond to these results," he said on Vima FM radio.
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