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Big day ahead for markets: Will Europe back a government-debt aid plan?

February 10, 2010 |  5:03 pm

Crisis over, or just on hold?

Yields on Greek, Portuguese and Spanish government bonds tumbled Wednesday for a second straight session, as investors and traders bet that richer European governments would come through with an aid package to back up the finances of their poorer neighbors.

The yield on 2-year Greek government notes dived to 5.52% from 6.31% on Tuesday and 6.63% on Monday. And European stock markets were mostly higher for a third day after last week’s plunge.

But the latest news reports from Europe suggest government authorities still aren’t sure what to do about their debt crisis, or how soon.

Greekstrike The Wall Street Journal reports that euro-zone finance ministers held a conference call Wednesday and that “a senior Spanish official said participants discussed mechanisms that could be used to guarantee Greek debt.”

Reuters reports that “Euro area finance officials said bilateral aid by individual European Union members, chiefly Germany and France, or guarantees for Greek debt issues appeared the most likely solution, but cautioned that no decision on the form of assistance was imminent.”

European Union leaders are scheduled to meet Thursday, but it isn’t clear that they’ll be ready to announce something. Whether they do or don't, it could make for another wild day in global markets.

If an aid package is announced, “Markets could try to test such a commitment,” Carsten Brzeski, an economist at ING Group in Brussels, told Bloomberg News. “Markets would probably be enthusiastic at first glance, but at second glance there might be people trying to check how strong this commitment was.”

Greece’s soaring budget deficit has raised fears that the government might default on its debt. Those worries drove up interest rates on Greek bonds in recent weeks and began to infect other countries struggling with ballooning deficits, including Portugal and Spain. The concerns also hammered the euro currency, which fell on Monday to a nine-month low. On Wednesday the euro slipped again.

On Tuesday, European leaders were promising to come up with some kind of plan to calm the markets. An EU-backed debt guarantee program appeared to be the favored step: In effect, Germany and other wealthy nations would be standing behind the debt of weaker countries.

In one encouraging sign, investors were willing to buy $4.1 billion of 10-year notes from Portugal on Wednesday, though the government had to pay a yield of 4.82% on the notes, well above the 4.55% market yield on previously issued 10-year notes.

By contrast, the U.S. Treasury paid a yield of 3.69% on $25 billion of 10-year notes sold Wednesday.

-- Tom Petruno

Photo: Striking Greek government workers in Athens protest the government's austerity plan to slash its budget deficit. Credit: Simela Pantzartzi / EPA