Greek markets took a beating on Wednesday and borrowing costs surged as the government said it is considering all options to raise funds, including selling bonds directly to the public.
In a sign of the challenge the country faces to repair its ailing public finances and raise 53.3 billion euros in financing needs this year, the finance minister said the government was considering issuing so-called popular bonds.
"Greece is looking into everything," George Papaconstantinou told reporters when asked if Greece would consider selling such bonds. "However, this is not the only solution. We have not taken any decision."
Greece's deteriorating public finances have prompted one of the worst crises in the euro zone since the single currency was introduced as the country attempts to cut its budget deficit, which hit 12.7 percent of gross domestic product in 2009. "I think it's fair, they are trying to use all the possible tools they have to raise funds," said Diego Iscaro, an analyst at Global Insight IHS. "I'm not sure what the reaction would be in markets though" (if the government goes ahead with issuing popular bonds).
The prospect of more Greek debt being issued in the market pushed the spread on the country's 10-year government bonds over German Bunds to a euro lifetime high of 309 basis points, up 44 basis points since Tuesday.
The cost of insuring against Greek sovereign debt default rose to a new record high of 345,500 euros per 10 million euros.
Greece's troubles also helped push the euro to a five-month low against the dollar on Wednesday, as it highlighted concerns about the fiscal health of members of the 16-member euro zone.
The Greek leading stock index fell 3.5 percent.
BUNDESBANK WARNING
An official at Germany's Bundesbank warned on Wednesday that if Greece does not sort out its budget problems quickly, bail-out talk will take take on its own dynamic and risks setting a dangerous precedent that could damage the euro.
"If (Greece) does not manage to get its budget problems under control, the discussion about a European bail-out will grow in vehemence and take on its own dynamic," Bundesbank board member Hans Georg Fabritius said, according to a text of a speech.
"But the precedent which would result would hurt the credibility of the euro in the remaining countries and shake the foundations of the currency union," he said.
There was talk in debt markets that Greece could make a private placement of bonds later this month but Papaconstantinou said there was no such decision.
Greece has already issued 5.3 billion euros in debt so far this year and it has refinancing needs of 4.3 billion in maturing treasury bills in January.
Brussels is pressuring the country to rapidly reduce the budget gap and the new Socialist government has launched a plan to cut spending and bring the deficit down to 2.8 percent of GDP in 2012 but markets are impatient for concrete action.
European Union finance ministers this week piled pressure on the Greek government to act quickly to implement the deficit-cutting plan, which includes cuts in welfare spending, tax reforms and savings on public sector wages.
"Greece knows that it has to catch up on its homework," European Central Bank policymaker Juergen Stark said on Wednesday. "There have been the first steps and positive signs."
