European governments hinted at giving Greece extra time to meetbudget-cut targets, as long as the financially stricken country'sfeuding politicians put together a ruling coalition committed toausterity.

Calling talk of a Greek pullout from the euro “nonsense” and“propaganda,” Luxembourg Prime Minister Jean-Claude Juncker saidonly a “fully functioning” Greek government would be entitled totinker with the conditions attached to 240 billion euros ($308billion) of rescue aid.

“The government would have to stand by the program,” Junckertold reporters after chairing a meeting of euro-area financeministers in Brussels late yesterday. “If there are dramaticchanges in circumstances, we wouldn't close ourselves off to adebate over extending the deadlines.”

Greece's post-election impasse multiplied the signs of stress inEuropean markets yesterday. The euro fell for the 10th time in 11days and stocks surrendered a two-day gain. Bond yields inrecession-wracked Spain, the next potential candidate for financialsupport, touched a five-month high.

“The euro breakup story is gathering steam again,” MarchelAlexandrovich, a senior European economist at JefferiesInternational in London, said in a research note. “If Greece wereto ever exit the euro, no amount of reassuring comments willconvince investors that other countries won't soon follow.”

Greek President Karolos Papoulias will call party leaderstogether today, the ninth day of post-election maneuvering, to makethe case for a government of prominent non-politicians. The head ofthe biggest anti-bailout party, Alexis Tsipras, will attend afterboycotting yesterday's bargaining sessions, state-run NET TVreported.

“Solidarity is a two-way street,” European Union Economic andMonetary Commissioner Olli Rehn said. “We expect that thecommitments are respected and the fiscal targets are a core part ofthe commitments.”

Greece's caretaker government will also announce whether it willrepay 436 million euros due today on a note held by investors whoshunned its bond-loss accord. Paying the holdouts in full wouldanger investors who took losses in this year's debt restructuring,while withholding payment could be construed as default.

'Big Problems'

Investors pummeled Greek stocks, pushing the ASE Index down 4.6percent to 584.04 yesterday, the lowest since November 1992. Thedrop extended last week's 11 percent plunge.

“Greece needs to elect a pro-reform and pro-austerity parliamentor I foresee big problems,” Dutch Finance Minister Jan Kees deJager said. “There is no room to weaken the agreements by reformingless or reducing spending cuts.”

Questions for European policymakers include whether to ease theconditions linked to Greece's financial infusions in order to keepit in the euro or, if that fails, how to contain the damage of whatwould be an unprecedented exit.

No answers emerged last night. As in early 2010 when the firstGreek bailout and broader rescue fund were improvised, the wayforward will be charted by top political leaders. Their next summitis May 23 in Brussels, the 18th since the debt crisis exploded.

German Chancellor Angela Merkel, the dominant figure in twoyears of crisis containment, said Greece will “always” be part ofthe European Union, a 27-nation bloc with a common market, businessregulations and trade policy. Speaking to a school group in Berlinyesterday, she didn't offer the same assurance about Greece holdingon to the euro, saying only that “it's better for the Greeks tostay in the euro area.”

The once-taboo issue of a Greek departure or expulsion from the17-nation currency union burst into the public debate last week,when European Central Bank officials including Patrick Honohan ofIreland aired the pros and cons.

Greece's predicament magnified doubts about the health of Spain,the only euro country to remain mired in recession through 2013,according to European Commission forecasts published last week.

Ten-year Spanish yields rose as high as 6.36 percent beforesettling at 6.23 percent yesterday, compared with 6.01 percent atthe end of last week. The extra yield over benchmark German levelswidened to 477 basis points. Spain's woes helped drag up Italian10-year yields to 5.71 percent from 5.51 percent.

President Hollande

The euro ministers saluted Spain's newfound resolve to clean upits banking system and agreed that “speed is of the essence” incompleting that process, Juncker said.

Another political turning point comes today, when FrancoisHollande is sworn in as French president in the first power shiftto the Socialists in the second biggest euro economy since1981.

Hollande's bid to inject a pro-growth element into theausterity-dominated approach to the crisis got a boost on May 13when Merkel's party was drubbed in elections in Germany's largest,most industrial state, North Rhine-Westphalia.

The regional vote maintained the rival Social Democrats' hold onthe upper house of the German parliament and gave them leverage toprod Merkel into concessions before ratifying a eurodeficit-limitation treaty, one of her hallmark crisis-fightinginitiatives.

Hollande campaigned against that treaty as well, pledging toflank it with pro-growth measures at a time of 10.9 percentunemployment across the euro zone, the highest since the currency'sdebut in 1999.

Merkel, set to host Hollande in Berlin today hours after hisinauguration, said she won't alter her approach to the crisis inthe wake of her party's “bitter, painful defeat.”

Also held up until France's new government takes office areappointments to a vacancy on the ECB's Executive Board, of asuccessor to Juncker as chairman of euro finance meetings and ofthe manager of the European Stability Mechanism, the futurepermanent rescue fund.

Juncker opened the nomination process for the ESM postyesterday. He doubted a new euro finance chairman would be namedbefore the end of June.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.