Greece's borrowing costs hit a new high on Wednesday after the government said the country's banks had asked for billions of euros in support and eurozone states argued over the conditions of potential bailout loans. Investors shed bank shares and drove up the premium demanded for buying Greek rather than German bonds, fuelling a vicious cycle of economic downturn and market scepticism over Athens' ability to cut its huge public deficit.
Prime Minister George Papandreou hailed a eurozone/International Monetary Fund safety net deal agreed last month to help the country of 11 million avoid bankruptcy and said it rendered the crisis manageable. But the banks' request for extra help highlighted the problems facing the entire Greek economy, expected to shrink at least 2 percent this year partly as a result of austerity measures imposed to tackle the deficit.
Hit by a series of credit rating downgrades, the banks asked to tap some 17 billion euros ($22.7 billion), mostly in state guarantees, that remain from a 28 billion euro support scheme launched in 2008 to help them cope with the credit crisis. "They want to have additional safety, now that the economy and the banking system are under pressure," Finance Minister George Papaconstantinou said, adding that Greece could not afford to borrow at current rates for long.
Greek bank shares fell 3.7 percent after government yield spreads hit a new euro lifetime high, meaning higher financing costs for Greek lenders. The 10-year Greek/German government bond yield spread widened to 412 basis points - its largest gap in the lifetime of the euro currency bloc, from around 392 bps at the European close on Tuesday. Papandreou said the EU-IMF deal had given Greece the backing it needed to beat the crisis. "This agreement is clearly a great success for our country and the European Union," he said. "With this safety net we are in a situation which is manageable under any circumstances."