LONDON — As interest rates on Greek debt spiral upward again, the question facing Europe is no longer whether Athens has the political will to cut spending and raise taxes to curb its gaping budget deficit, but whether Greece will run out of money before it gets the chance to do so.
Interactive Map Debt Rising in Europe.With the rate on 10-year Greek bonds reaching as high as 7.5 percent on Thursday, up from 6.5 just three days ago, the cost of insuring against a Greek default hit a record high.
The message from the market could not be clearer: artfully worded communiqués from Brussels will no longer suffice. To avoid bankruptcy, analysts said, Greece needs a bailout from Europe, and fast.
“This is no longer about liquidity; it’s a solvency issue,” said Stephen Jen, a former economist at the International Monetary Fund who is now a strategist at BlueGold Capital Management in London.
But with European officials consumed with a debate over whether loans to Greece should be offered at rates consistent with a typical I.M.F. bailout or punitive ones closer to current market levels, the risk is that while Brussels fiddles, Greece is burning.
At a press conference on Thursday, Jean-Claude Trichet, the president of the European Central Bank, sought to break the fever in the markets by saying that the aid program proposed by the International Monetary Fund and the European Union was a “very, very serious commitment.”
The statement helped bring yields on 10-year Greek government bonds down from their peak for the day, to 7.35 percent, but it was not enough to turn around the mood of pessimism that contributed to a further fall in Greek and other European stocks.
“Time is running out,” said a senior official in the Greek government who spoke on condition of anonymity because of the delicacy of the issue. “The market is testing Europe’s resolve.”
To a large extent, this latest bout of Euro-stasis is a function of Germany’s view that it is not the market contagion from the Greek drama that presents the greatest risk to Europe.
Instead, Berlin is far more worried, as Mr. Jen puts it, about the supposed “contagion of bad behavior” in other countries like Portugal and Spain that might follow if Greece were to become the beneficiary of a bailout on relatively generous terms.
“This should be easy to do; Greece is only 3 percent of Europe’s G.D.P.,” said Paul De Grauwe, an economist based in Brussels who advises the president of the European Commission, José Manuel Barroso. “But this is no longer a financial issue. It is about politics and nationalism, and it is a real setback for those who believed in a united Europe.”
There are unmistakable signs that individuals and corporations are withdrawing funds from Greek banks, although the sums involved do not yet constitute a bank run.