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Will a country having a spending and debt crisis still argue against fiscal austerity?

*AP, by Derek Gatopoulos & Daniel Woolls, April 18, 2011

”Greek debt crisis haunts markets again

Europe’s debt crisis returned to haunt markets Monday as investors fretted over a possible Greek default and the impact of huge gains for a nationalist party in Finland.

It was also a day that Portugal began discussions on a financial bailout and Spain had to pay a much higher interest rates to tap bond investors.

Although borrowing costs for countries like Greece, Ireland and Portugal have risen sharply higher in recent weeks, the euro managed to brush off debt crisis concerns, hitting a 15-month high last week above $1.45. The currency has been buoyed by predictions that the European Central Bank will follow April’s first interest rate hike in nearly three years with more policy tightening.

That benefits the euro if investors don’t expect others, such as the Federal Reserve, to do the same.

However, there was little hiding place for the currency Monday amid a stream of negative developments, which sent the euro down 1.1 percent to $1.4255, its lowest level since April 7.

Further debt jitters emerged with the news that Spain had to pay sharply higher interest rates to raise euro4.7 billion ($6.7 billion) in short-term debt, while the yield on Greece’s 10-year bonds spiked nearly a whole percentage point at one stage to 14.59 percent. That’s the first time it’s gone above 14 percent since the country took up the euro in 2001.

By late European trading, the yield had eased slightly to 14.56 percent, but the difference with benchmark German bunds was over 11 percent — a staggering differential given that the two countries use the same currency.

The renewed focus on Greece’s debts has come after some suggestions that the country would be better off looking for a way to renegotiate its debts.

Costas Simitis, Greece’s Socialist premier from 1996-2004, has backed calls for the country to deal with its debt mountain, arguing that a protracted austerity program may not work. A negotiated restructuring would be better, allowing Greece to rebuild its economy over the next 15 to 20 years, he argued.”

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