Europe again steps back from brink in debt crisis

Following a now-familiar script, Europe again averted disaster in its debt crisis when German lawmakers rallied behind Chancellor Angela Merkel to approve a stronger eurozone bailout fund on Thursday. But bigger challenges loom for the eurozone now. Financial markets are already anticipating a likely Greek default and demanding more far-reaching measures to prevent the crisis that began in Athens from spreading far beyond Europe and its banks.
---- German lawmakers back stronger EFSF, Merkel keeps majority
---- Greece's Papandreou to hold debt talks in Paris
---- Spain shelves state lottery IPO, Italy 10-year yield hits record
The Bundestag (lower house) overwhelmingly approved new powers for the 440-billion-euro EFSF fund to make precautionary loans, help recapitalise banks and buy distressed countries' bonds in the secondary market. Despite a rebellion by 15 backbench Eurosceptics, Merkel won 315 votes from her own centre-right coalition, enough to avoid the humiliation of having to rely on the opposition Social Democrats and Greens to pass the plan.
The measure was part of a July 21 agreement by eurozone leaders meant to solve the crisis by providing a second bailout for debt-stricken Greece, partly funded by private sector bondholders, and providing more firepower to prevent contagion engulfing bigger EU economies Spain and Italy.
The euro and European shares ticked up and safe-haven German bonds fell after the closely-watched vote in Europe's pivotal power, where public opposition to further bailouts is rife. But analysts said financial markets and outside powers still want a more comprehensive response from European Union policymakers to the debt crisis.
US President Barack Obama kept up a drum beat of criticism of the EU's crisis management, saying on Wednesday: "In Europe, we haven't seen them deal with their financial system and banking system as effectively as they need to." EU officials are already working on ways of leveraging up the rescue fund, but kept those legally and politically fraught options under wraps ahead of the German vote to avoid antagonising waverers in the Bundestag.
Underscoring the sensitivity, German Economy Minister Philipp Roesler, leader of the liberal Free Democrats, junior partners in Merkel's coalition, said on a visit to Brussels after the vote that Berlin does not want to leverage the bailout fund. The European Commission welcomed German approval of the EFSF boost and said it was confident the ratification process would be complete throughout the 17-nation currency area by mid-October.
Elsewhere in Europe, there was a sense of relief. French President Nicolas Sarkozy telephoned Merkel to congratulate her and invited Greek Prime Minister George Papandreou to talks in Paris on Friday to discuss Greece's precarious debt situation. Papandreou met Merkel in Berlin on Tuesday.
Cyprus also back the EFSF's new powers on Thursday, taking the number of states that have approved to 12. Of the remainder only Slovakia's endorsement looks politically tricky. Spain's ruling Socialists abruptly shelved plans to boost public coffers by selling part of the state lottery for up to 9 billion euros ($12 billion), in the face of tough market conditions, political opposition and banks' funding concerns.
The backtracking, a day before book building was supposed to begin on the public offering of 30 percent of Loterias, was a blow a few weeks before a November 20 election, which opinion polls show the centre-right People's Party sweeping. Banks involved in the sale, Santander and BBVA, saw the Loterias flotation as a direct rival to their efforts to bolster their capital by enticing Spaniards to withdraw deposits to invest in lottery shares.
Italy meanwhile had to pay the highest yield on a 10-year bond since the introduction of the euro in 1999 at an auction on Thursday, the first long-term sale since Standard & Poor's cut the country's sovereign credit rating. Rome's funding costs remain under pressure despite ECB bond-buying and a pick-up in risk appetite due to expectations of a stronger euro rescue fund. Analysts say the government's tentative crisis response has harmed investor confidence. Italy sold 7.86 billion euros of long-term bonds, moving closer to an overall issuance target of 430 billion euros for the year, but the 10-year yield rose to 5.86 percent at the auction, up from 5.22 percent a month ago.