German Chancellor Angela Merkel sought on Tuesday to quash talk of an imminent Greek default as the United States voiced fresh concern at the euro zone's inability to master its debt crisis.
Merkel said in a radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets.
Asked by RBB inforadio whether a Greek default would doom the euro, she answered: "We are using all the tools we have to prevent this. We need to avoid all disorderly processes with regards to the euro."
Calling Europe's challenge "historic," Merkel added that everything must be done to keep the euro zone intact "because we would see domino effects very quickly."
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U.S. President Barack Obama expressed his concern in an interview with Spanish journalists published on Tuesday. U.S. Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday.
It will be Geithner's second trip to Europe in a week after he met his main EU counterparts at a G-7 meeting in Marseille — a measure of growing alarm in Washington about the crisis.
Obama was quoted as saying euro zone leaders need to show markets they are taking responsibility for the debt crisis and work out how to tally monetary union with budget policy.
Greece is the immediate concern, but an even bigger problem is what may happen should markets take another run at the larger economies of Spain and Italy, he said.
"It is difficult to coordinate and agree a common path when you have so many countries with different policies and economic situations," Obama said, according to El Mundo newspaper's website.
"In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective coordinated fiscal policy," the news agency EFE quoted him as saying.
ITALY YIELDS SOAR
Markets have already priced in the near certainty of a Greek debt default. Credit default swap prices suggest a 90 percent probability of default in the next five years, according to CDS pricing data provider Markit.
Pressure on Italy mounted again on Tuesday at a bond auction seen as a test of efforts by the European Central Bank to hold down Rome's borrowing costs by buying government bonds in return for austerity measures to cut its budget deficit.
The five-year bond yield hit a euro lifetime high of 5.60 percent at the auction despite ECB purchases in the secondary market that led to the resignation of the central bank's German chief economist, Juergen Stark, last Friday.
"Disappointing auction result with even the relatively soft cover seen here coming at an enormous price," Richard McGuire, a strategist at Rabobank in London, said.
Hopes that China might step in as a savior to buy Italian bonds, after an Italian request and recent talks, failed to provide much support for the auction.
Italian Economy Minister Giulio Tremonti met Chinese officials last week, a Treasury spokesman said, after the Financial Times reported that Rome had asked China to buy "significant" quantities of its debt.
The spokesman declined comment on the substance of the meeting with a delegation that included the head of China's sovereign wealth fund.
A Chinese Foreign Ministry spokesman said Beijing had confidence in Europe's ability to handle its debts, but sought assurances that Europe would ensure the safety of its investments in the region.
Wu Xiaoling, a former deputy governor of the People's Bank of China, told Reuters on Tuesday that investor "panic" about Europe's debt crisis was unnecessary, and China was ready to work with others to boost market confidence.
Chinese leaders have repeatedly offered verbal support to Greece, Portugal and Spain but encouraging words have not so far been matched by spectacular action.
China held just over 7 percent of euro zone government bonds at the start of this year, according to an estimate published by the French business daily La Tribune and confirmed privately by a senior EU official as "in the ballpark."
Beijing has continued to buy European debt this year but traders say the volume has been modest and mostly in high-grade paper rather than bonds of the weaker peripheral countries.
"They are not exiting the market. They are among the few who are still there," another EU source said. "We are relying on the ECB and the Chinese."
French bank shares fell further on Tuesday after losing 10 percent on Monday due to market concern about their exposure to Greek and other peripheral EU debt.
Markets have been unsettled by growing talk among German politicians about the likelihood of a Greek default and a possible suspension of Greece from the single currency area.
Merkel said the euro zone would only have a procedure for an orderly default in place from 2013, when a permanent crisis resolution mechanism is due to come into effect.
"In a currency union with 17 members, we can only have a stable euro if we prevent disorderly processes. Therefore it is our top priority to avoid an uncontrolled default, because it would hit not only Greece. The danger would be very high that it would hit many other countries," she said.
Obama's comments suggested that Washington is trying to nudge European governments towards closer fiscal union but European politics, especially in Germany, make that difficult.
The German Constitutional Court last week appeared to rule out issuing common euro zone bonds unless Berlin amended its Basic Law and the EU adopted a new treaty.
Merkel suggested the way forward should involve sharper punishment for states that violate the bloc's budget discipline rules, which have been repeatedly breached in the last decade, including by central euro zone powers Germany and France.
"Until now, for example, if countries violate the Stability and Growth Pact they cannot be taken before the European Court of Justice," she said.
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