A month after the European Union announced plans for the biggest international bailout in history, the scheme is preventing financial disaster but failing to calm persistent fears in the markets.
Indebted euro zone countries other than Greece are retaining their ability to raise money in the bond market, avoiding the worst-case scenario that appeared possible before the scheme was announced: a string of debt restructurings or defaults.
But part of Europe's interbank money market remains frozen as nervous banks refrain from lending to each other. Bond yields have been rebounding after a dip in mid-May, and the cost of insuring banks and governments against default is sky-high.
European policy makers are clearly worried and frustrated by the failure of their unprecedented scheme to calm the markets.
European Central Bank Governing Council member Axel Weber said on Wednesday that the way in which the markets were taking a skeptical view of the scheme was "incomprehensible".
But analysts say fears over Europe's debt problems and slow growth may have become too serious to be resolved by any bailout plan, however large.
Markets may only start returning to normalcy if Europe demonstrates that it can achieve steady economic growth while cutting its government budget deficits — a process that could take many months, even years.
"The underlying, fundamental problem is not being addressed," said Daniel Gros, director of the Centre for European Policy Studies in Brussels.
"It's a problem of insolvency that is actually in marginal parts of Europe, but it's like a bag of apples — a few rotten ones infect all the others."
A Reuters poll of 52 economists, published on Thursday, found exactly half of them thought the worst of the euro zone's debt crisis had passed. Others saw the possibility of worse instability, despite the EU's bailout plan.
On May 10, European governments announced that along with the International Monetary Fund, they would provide as much as 750 billion euros ($915 billion) of emergency loans if that became necessary to help euro zone states finance themselves.
The European Central Bank backed that up by launching an unprecedented program of buying government bonds of the most indebted countries from the secondary market.
Strong demand at Spanish and Portuguese government bond auctions this week showed the EU had succeeded in preventing those countries from losing access to the debt market. Spain looks likely to meet a 16.2 billion euro bond redemption on July 30, its last big redemption this year.
But both countries had to pay massive spreads on their bond issues, which they cannot do indefinitely without worsening their debt problems.
Other areas of the markets have continued to deteriorate in the past month. The euro has lost about 10 cents against the dollar, while benchmark interbank lending rates hit a five-month high this week. The costs of insuring against debt defaults by European governments and banks through credit default swaps are back near early May highs.
Policy makers themselves appear partly to blame. Weber himself has criticized the ECB's bond-buying strategy as inflationary, making investors wonder whether the central bank would be willing to step up its buying aggressively enough to offset any fresh wave of panic in the market.
EU finance ministers have so far resisted publishing the results of "stress tests" of the health of individual banks. Many investors think more transparency could reassure the markets by revealing the full extent of problems.
Gros said the rot would spread if governments refused to come clean on specific bank exposure to the debt of various governments and sectors.
"Nobody knows exactly what the magnitude of the problem is, and when you don't know you assume the worst."
And though governments are moving to tighten rules on fiscal discipline in the zone, they are showing few signs of correcting big imbalances in policies that cause economic tensions. For example, Germany is determined to tighten fiscal policy rather than keeping it loose to help European trading partners.
There are also more fundamental grounds to doubt whether any bailout could be large enough to rescue the weakest countries in the euro zone.
In order to reassure the debt market, the most indebted countries are being pressured into draconian austerity programs that are expected to slow economic growth, putting fresh pressure on their tax revenues and banking systems.
The Reuters poll of economists published on Thursday found them estimating a 30 percent chance of the euro zone slipping back into recession, a bigger chance than for Britain or the United States.
Given the poor outlook for growth, many investors think the debts of one or more euro zone countries may simply be too large to manage over the long term. A bailout would buy them time, but they would eventually prove unable to repay the bailout loans, and Europe's rich countries would not support them indefinitely.
World Bank President Robert Zoellick raised this possibility in a speech in Berlin on Wednesday when he said that in some situations, debt restructurings might be the best course of action — though he did not specify whether he thought any European countries had reached that point.
"If it becomes clear that a particular debtor cannot pay back its borrowings, a managed restructuring, combined with financial support, can create confidence that growth can be restored," he said.
Lena Komileva, economist at brokerage Tullett Prebon, said the combination of slow growth and austerity in the euro zone was deterring many private investors from buying government bonds in response to the ECB's reluctant purchases.
"The euro bloc remains burdened by the toxic arithmetic of a debt crisis that will keep investors away — spreading government default risk and loss of confidence in the currency, government spending cuts, rising taxes, job losses, credit shortages, undercapitalized banks and indebted households."
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