Global concern about the debt crisis rocking the euro zone mounted on Wednesday, with Washington sending a top U.S. Treasury envoy to Europe and G20 officials discussing the turmoil in a conference call.
A day after investors pushed the risk premiums on Spanish and Italian government debt to new highs, the bond spreads of countries on Europe's southern periphery narrowed and the euro steadied on speculation that the European Central Bank could unveil new anti-crisis steps at a meeting on Thursday.
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But calmer markets failed to remove deep worries about contagion in the 16-nation euro bloc that has pushed European policymakers onto the defensive and forced them to search for new ways to stabilize their 12-year-old currency project.
An 85 billion euro ($110.7 billion) EU/IMF rescue of Ireland last weekend and public reassurances from European politicians and central bankers have been largely ignored by investors, who have targeted Portugal, Spain and Italy, intent on testing the EU's resolve and crisis-fighting resources.
"You may think and you sometimes read that Europe is in chaos, disintegrating, the euro about to disappear. This is wrong," Klaus Regling, the head of the EU's temporary rescue mechanism, said in a speech in Singapore.
Reflecting global concerns about the euro zone crisis, the U.S. Treasury announced late on Tuesday that it would dispatch Undersecretary for International Affairs Lael Brainard to Europe this week to discuss the turmoil.
Brainard will visit Madrid, Berlin and Paris to discuss "economic developments in Europe" and the "shared agenda on strong and sustainable growth," the Treasury said in a brief statement.G20 sources told Reuters that deputy finance ministers from the group of major rich and developing nations had discussed the financial situation in Europe on Monday in a previously arranged conference call, although they described the call as routine.
Citigroup Chief Economist Willem Buiter warned in a research note this week that the euro zone turmoil may be the "opening act" of a global sovereign debt crisis that could soon infect the United States and Japan.
EU plans to make private bond holders shoulder some of the pain from any sovereign debt restructuring after mid-2013 have led investors to reassess the risk of putting their money in the government bonds of high-deficit countries.
European Central Bank President Jean-Claude Trichet warned markets on Tuesday against underestimating the determination of policymakers to stabilize the euro zone, but their options for stopping the rot appear limited.
The ECB could decide to increase the scale of its bond purchase program at its Thursday meeting, but resistance to such a step is high on the bank's Governing Council, with some members instead advocating an end to extraordinary crisis measures.
Meanwhile, Germany has resisted pressure from countries such as France to turn the euro zone into a "fiscal union" in which member states sacrifice sovereignty over economic policy for the good of the group.
Chancellor Angela Merkel is also skeptical about putting up more funds for bailouts, concerned that German taxpayers would end up shouldering the lion's share of a string of rescues of countries which Berlin believes have made themselves vulnerable through economic mismanagement.
Peter Bofinger, a member of the "wisemen" panel of economic advisers to the German government, said the risks to the euro were "enormously large" and Germany needed to decide whether it wanted to let the currency fail or do more to save it.
"For me it is decisive that we ask ourselves in Germany whether we want to continue to have the euro or not," Bofinger told Germany's NTV television late on Tuesday. "We must have this discussion because we must ask ourselves whether we find it worth it to stand up for it."
The euro edged higher on Wednesday, trading at $1.3060 after dipping to a 10-week low against the dollar on Tuesday. The premium investors demand to hold Portuguese, Spanish and Italian bonds instead of German benchmarks fell on speculation the ECB could take new anti-crisis steps on Thursday.
European bank stocks also rebounded strongly after losses on Tuesday.