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 European-wide 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 to further costs.
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."
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 will hold 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:
The interest Italy must pay to raise €3 billion ($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. Investors are demanding a high rate for fear that Italy might soon need financial aid.
A European deal to save Spain's banks has failed this week to defuse worries about Spanish debt.
"They mucked up Spain so badly that now it's impacted Italy," said Gary Jenkins of Swordfish Research, a bond research consultancy. "There's a lot of fragility there."
Italy has the eurozone's third-largest economy. For now, it can finance its debt. But the rising cost of doing so is causing pain. With the economy in a deep recession, the debt is expected to keep rising. The latest figures released Thursday showed it hit a new high of €1.95 trillion ($2.4 trillion) in April.
To lower the debt, Italy's economy must become more competitive. Monti has admonished Italian lawmakers not to slow the passage of key reforms. Still, he recognizes that a resolution can't happen if bond investors keep pushing up Italy's borrowing rates over concern about the eurozone's future. Monti has pressed his European counterparts to seek ways to steady market confidence.
Spain's troubles keep growing. A €100 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.
The interest rate — or yield — on the country's benchmark 10-year bonds rose to a record 6.96 percent in early trading, close to the level which many analysts say is unsustainable in the long run and the rate that forced Greece, Ireland and Portugal to seek bailouts.
Spain won't immediately collapse if the rate hits 7 percent, Reaching that point, though, would squeeze the government next week, when it's scheduled to auction debt.
"The clock is definitely ticking," said Michael Hewson, an analyst with CMC Markets.
Details of what the bailout might look like began to emerge Thursday. European officials are considering liquidation — selling a bank's assets — as part of the plan to bolster Spain's banks, a spokesman for Competition Commissioner Joaquin Almunia said.
"Liquidation is always looked at," said Antoine Colombani. "We prefer to liquidate when it's cheaper for the taxpayer."
Greece's national elections 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. Greek law forbids the release of such polls in the final two weeks of a campaign.
It isn't clear what effect a Greek exit from the euro would have. Some experts say it would fuel fear that other countries like Portugal might leave as well, threatening to create a domino effect. Because Europe, as a whole, is the largest economy in the world, a Greek exit would roil financial markets. It would also hurt Greece's trade with countries from the United States to Japan.
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 stressed Thursday that nations that have needed bailouts must work to restore trust and their public finances. She's unlikely to agree to allowing greater government spending to spur growth. But she might be open to allowing some countries to slow their pace of spending cuts.
Beyond growth, market experts say European nations must act to integrate their finances and debt to boost confidence in the eurozone. Fears that Spain or Italy cannot manage its debts could subside if a stronger country like Germany agreed to shoulder some of it.
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. Europe's weak governments must fix their public finances first.
"Yes, Germany is strong," she said. "But we also know that Germany's strength is not infinite."
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