The cost of bailing out Spain's (EURO)1.1 trillion ($1.39 trillion) economy would likely outstrip current global ability, even after the International Monetary Fund announced late Monday that a round of contributions had increased its lending capacity to $456 billion, exceeding a round of pledges made in April.
The Spanish delegation to the G-20 bemoaned the rise in the country's borrowing costs and said the market reaction didn't correspond to the reality of Spain's economic strength.
The IMF said in a staff report Monday that Europe was unlikely to conquer its budget problems without a greater focus on policies that promote growth. European governments should make it easier to hire and fire workers, simplify government regulations of the economy, and make it easier for workers to move to other European countries for jobs, the fund said, reforms could boost growth in the region by 4.5 percent over the next 5 years.
Even with good news that the party winning Greece's election Sunday supports the bailout and staying in the euro currency, there is lingering disagreement over the terms of the international bailout, which required harsh cutbacks in spending that many in Greece blame for widespread hardship suffered by ordinary citizens.
Merkel has indicated that finding room for negotiation might not be so easy, saying Greece had to hold its side of the bargain and that "we have to count on Greece sticking to its commitments."
But a European Union official on Tuesday argued that the terms of Greece's bailout will be renegotiated because worsening economic conditions have made the old bailout agreement an "illusion".
The official, who spoke on condition of anonymity, citing policy, said that the goals of the agreement would not be changed: They remain to reduce Greece's debt to a level that is sustainable and to reform its economy to make it competitive. But how those goals are achieved, and over what time period, will be up for discussion.
Associated Press writers Jack Chang contributed to this report from Los Cabos, Mexico, Christopher S. Rugaber and Jim Kuhnhenn from Washington, and Sarah DiLorenzo from Brussels.