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Worries over Europe’s debt crisis kept markets on edge Monday, following a warning over Italy’s credit rating and a failure by eurozone finance ministers to agree an immediate release of bailout funds to Greece.

Though the finance ministers of the 17 countries that use the euro agreed to hand over the next bailout installment, worth euro12 billion ($17 billion), they said they would only do that if the Greek Parliament backed further austerity measures.

With the Greek government facing a confidence vote in Parliament on Tuesday, there’s still an element of political risk and that’s clearly weighing on markets at the start of a week that’s likely to be dominated again by the country’s woes. Though Prime Minister George Papandreou’s newly-reshuffled government is expected to prevail in the confidence vote, there’s still uncertainty over the passage of another euro28 billion in austerity measures.

“Until markets see some solid plans put in place to deal with Greece, the markets are only going to be heading in one direction,” said Simon Furlong, a sales trader at Spreadex.

In Europe, the FTSE 100 index of leading British shares was down 0.7 percent at 5,676 while Germany’s DAX fell 1 percent to 7,093. The CAC-40 in France was 1.1 percent lower at 3,783.

The biggest faller of Europe’s main stock markets was Italy’s FTSE MIB index, which was trading 2.5 percent lower at 19,597, after Moody’s warned Friday that it may downgrade its Aa2 rating on the country.

U.S. markets were also set to shed all the gains posted on Friday, when Germany appeared to back a plan to bailout Greece for a second time. Dow futures were down 0.4 percent at 11,886 while the broader Standard & Poor’s 500 futures fell a similar rate to 1,261.

The euro was 0.3 percent lower at $1.4234, having enjoyed a rally Friday after German Chancellor Angela Merkel indicated that private creditors, such as banks, would not be compelled to share any pain in a second bailout of Greece bad credit payday advance. Instead, she backed the line touted by the French government and the European Central Bank that any private sector involvement has to be on a “voluntary” basis.

“The whole concept of voluntary participation of private investors in roll-overs of debt does not appear to have been resolved leaving the financial markets skeptical of the plan that includes true voluntary participation,” said Derek Halpenny, European head of global currency research at The Bank of Tokyo-Mitsubishi UFJ.

As the week progresses, attention will shift to the U.S. and the Federal Reserve’s rate-setting meeting. As well as keeping its benchmark rate unchanged at near zero percent, the Fed is expected to confirm that its current monetary stimulus will end as expected at the end of this month.

Earlier in Asia, Japan’s Nikkei 225 was one of the few benchmarks posting gains for the day. The benchmark gained less than 0.1 percent close at 9,354.32 despite data showing the country’s exports dropped for the third straight month in May due to massive production losses following the March 11 earthquake.

South Korea’s Kospi sank 0.6 percent to 2,019.65, while Hong Kong’s Hang Seng shed 0.4 percent to 21,599.51

Mainland Chinese shares extended losses for a fourth straight trading session amid a lack of funds as banks complied with the central government’s latest order to raise the level of deposits they must hold as reserves.

The Shanghai Composite Index lost 0.8 percent to 2,621.25, its lowest close this year, while the Shenzhen Composite Index lost 1.1 percent to 1,073.19.

In the oil markets, worries over the global economy pushed prices lower again. Benchmark oil for July delivery was down $1.24 to $91.77 a barrel in electronic trading on the New York Mercantile Exchange.

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Pamela Sampson in Bangkok contributed to this report.

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TORONTO

Inflation in Germany, Europe’s largest economy, unexpectedly eased in May after oil prices dropped from a 2 1/2-year high.

The harmonized inflation rate fell to 2.4 percent from 2.7 percent in April, the Federal Statistics Office in Wiesbaden said today. Economists had expected inflation to hold at the highest level since September 2008, the median of 17 forecasts in a Bloomberg News survey showed. On the month, consumer prices declined 0.2 percent.

Oil prices have dropped 11 percent this month after breaching $114 a barrel in April, leaving households with more money to spend. European Central Bank officials have signaled they are ready to raise borrowing costs further to curb price pressures after increasing the benchmark interest rate to 1.25 percent last month, even as peripheral nations such as Greece, Portugal and Ireland remain mired in a sovereign-debt crisis.

“Today’s German inflation numbers are just a temporary breather,” said Carsten Brzeski, an economist at ING Group in Brussels. “Obviously, with these inflation numbers, the ECB won’t hastily rush to a June hike. The German data is also not soft enough to put the ECB off from another hike in July.”

On a non-harmonized basis, inflation slowed to 2.3 percent in May from 2.4 percent and prices were unchanged on the month, the statistics office said.

Price Mandate

VCI, the main association of German chemical companies, on May 17 raised its forecast for production, sales and prices this year in the industry, on increasing global demand.

“We have to avoid commodity-price increases becoming entrenched in longer-term inflation expectations, which could have second-round effects on wages and prices,” ECB President Jean-Claude Trichet said yesterday. “We are carefully monitoring the situation and we stand ready to do whatever is necessary to fulfill our mandate.”

Euro-area inflation probably remained at 2.8 percent this month, according to the median of 27 forecasts in a Bloomberg survey. The European Union’s statistics office in Luxembourg will publish the data on May 31. Economists in a separate survey forecast the ECB will raise its main lending rate to 1.75 percent by the end of the year.

The German economy grew 1.5 percent in the first quarter as companies boosted spending to meet increased export demand and construction rebounded from a slump in the previous three months. The government predicts growth of 2.6 percent this year after a record 3.6 percent expansion in 2010.

At the same time, countries from Greece to Portugal are struggling to grow amid a debt crisis that’s shaking the foundations of the single currency. The euro area will grow 1.6 percent this year after expanding 1.8 percent in 2010, the European Commission forecast this month.

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China, the biggest foreign owner of U.S. Treasuries, trimmed its holdings for a fifth straight month in March as American lawmakers grappled with a government debt set to reach its legal limit. [bn:WBTKR=HOLDCH:IND]

The Asian nation owns $1.145 trillion [] of the debt, down $9 billion, or less than 1 percent, from the previous month, according to U.S. government data released yesterday. The holdings reached a record $1.175 trillion in October last year.

China’s concern that U.S. government securities may become more risky because of the nation’s deficits and debt burden prompted its call this month for President Barack Obama’s administration to lay “a solid fiscal foundation” for long- term growth. Former Chinese central bank adviser Yu Yongding said last month that China should stop buying Treasuries because of the risk that the U.S. may eventually default.

China may “gradually cut its U.S. Treasuries as it seeks to diversify its foreign-exchange holdings,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA. She said “China is probably routing trades through other places such as London,” meaning U.S. data may not give a full picture.

The United Kingdom increased its holdings by $29.7 billion to $325.2 billion in March.

In the U.S., Republicans and Democrats have been arguing over when and how to raise a $14.3 trillion debt limit. Obama has said that a failure to act may disrupt the global financial system and plunge the nation into another recession.

Debt Ceiling

U.S. Treasury Secretary Timothy F. Geithner said yesterday that he has used accounting measures to extend the deadline until Aug. 2.

“China has kept on lending money to the U.S. to keep its export machine going, and to prevent losses” on its holdings of Treasuries, Yu said last month. “Perhaps it is too late to do anything about the existing stock without causing a serious political and financial backlash. But at least China should stop continuing building up its holdings.”

Officials including central bank adviser Li Daokui have urged diversification of the nation’s foreign exchange reserves away from U.S. debt.

Japan, the second-largest holder of Treasuries, increased its holdings by $17.6 billion to $907.9 billion in March from $890.3 billion in February. Hong Kong, counted separately from China, reduced its holdings by $2.5 billion to $122.1 billion from $124.6 billion.

–Zheng Lifei. Editors: Paul Panckhurst, Ken McCallum.

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net

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Citigroup Inc. Chief Economist Willem Buiter said that extending the maturities of Greek debt won’t solve the country’s underlying solvency problem.

“Extension of maturities is of course the final option that would allow them at least to get over the funding gap in 2012,” he said in an interview with Ken Prewitt on Bloomberg radio from Edinburgh. “It doesn’t solve the underlying solvency problem of the Greek sovereign.”

Standard & Poor’s yesterday cut the country’s debt rating two notches to B, citing the likelihood that Greece may need to restructure its debt. Euro-region officials said after an unscheduled May 6 meeting in Luxembourg that Greece needs “a further adjustment program.”

“It’s clear that Greece will have to find money somewhere in a hurry,” said Buiter. Greece “can’t get it in the market, so we either need a new package, an extension of the existing package, or rapid privatization of assets.”

German Chancellor Angela Merkel today refused to commit to more aid for Greece, saying that it is still too early to decide whether the Greek government will need more financial help to overcome the debt crisis.

“The consent has to be unanimous so it’s going to be very, very difficult” to get another bailout, Buiter said. “It’s an investment of reputational capital by politicians no fax payday loan. It doesn’t really make a lot of sense as you really are lending to an entity that’s insolvent.”

‘Ponzi Finance’

Buiter said that further lending to Greece would be futile.

“The way to deal with insolvency is not to lend more to the insolvent party, that’s Ponzi finance,” he said. “What you have to do is to face up to the reality of restructuring” which means taking “the necessary steps to restructure the sovereigns and the banks that are exposed to the sovereigns.”

Greece has slashed spending and raised taxes to reduce a budget deficit that reached 15.4 percent of gross domestic product in 2009, requiring a 110 billion-euro ($158 billion) bailout from the European Union and International Monetary Fund. Buiter criticized the Greek policy of raising revenue.

“Last year Greece responded to the tax shortfall by having tax amnesty,” he said. “That’s always a measure of despair which gives you money upfront in return for a complete undermining of your tax enforcement credibility in the future because everybody expects the next tax amnesty five years down the road.”

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Treasury Secretary Timothy F. Geithner will urge China to allow higher interest rates when he meets with Chinese leaders this week, as the U.S. extends its push for a stronger yuan.

Geithner will say China should relax controls on the financial system and give foreign banks and insurers more access, said David Loevinger, the Treasury Department’s senior coordinator for China. Officials from both nations are meeting in Washington today and tomorrow as part of the annual Strategic and Economic Dialogue.

U.S. officials argue that a yuan kept artificially cheap to help exporters also makes it harder for China to lift interest rates and curb an inflation rate that hit a 32-month high in March. China, led at the talks by Vice Premier Wang Qishan, blames record U.S. budget deficits for contributing to lopsided flows of trade and investment.

“It’s pretty clear that the current system is hurting them in their inflation fight,” said Dan Dorrow, head of research at Faros Trading LLC, a currency trading firm in Stamford, Connecticut. “The reason for that is the improperly priced exchange rate.”

The yuan was little changed at 6.4939 per dollar as of the 4:30 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 6.4892 on April 29, the strongest level since 1993.

Domestic Demand

As the talks opened today, Geithner called on China to shift its economy toward domestic demand and said the goals of the two nations are “not in conflict.” Wang acknowledged that there are some “clashes” in U.S.-China economic ties, while also emphasizing the “shared aspirations” between the two countries.

Senators Charles Schumer of New York and Jeff Merkley of Oregon called May 6 for a “rebalancing” in the U.S.-China economic relationship. The two lawmakers, who just returned from a trip to China, said the Chinese need to open their financial sector, address “abnormally low deposit and lending rates” and allow broader market access to foreign firms.

Chinese production and U.S. consumption shouldn’t be such dominating themes, the two Democrats said. “This situation is not sustainable and harms nearly all involved,” they wrote in a letter to Geithner.

China has raised interest rates four times since mid- October and lenders’ reserve requirement seven times. The benchmark one-year lending rate increased 0.25 percentage point to 6.31 percent on April 5. The one-year deposit rate stands at 3.25 percent.

Inflation Eases

The median forecast of 30 economists surveyed by Bloomberg News is for an annual inflation rate in April of 5.2 percent, down from 5.4 percent in March.

Vice Finance Minister Zhu Guangyao said on May 6 that China is paying “close attention” to U.S. efforts to reduce its budget deficit, and his country will focus on improving the quality of its exchange-rate mechanism.

China says a loose monetary policy in the U.S. has helped lower the value of the dollar, stoking global inflation in food and energy. A commentary today by the official Xinhua News Agency said the “plunging” dollar “has become the source of many current global economic problems.”

China held $1.15 trillion in Treasuries at the end of February, more than any other country. The U.S. trade deficit with China came to $18.8 billion in February.

Top Officials

Geithner and Wang will meet alongside Secretary of State Hillary Clinton and State Councilor Dai Bingguo at this week’s meetings, which will draw about 30 top Chinese officials.

The Obama administration and U.S. lawmakers say China’s currency policy gives the nation’s exporters an unfair competitive advantage, costing American jobs. Geithner is trying to convince Chinese officials that a stronger yuan has benefits for their economy.

Geithner said last week that allowing the yuan to rise and making the financial system less dependent on government- controlled interest rates would give Chinese leaders an “enhanced” ability to damp inflation.

The Treasury argues that higher interest rates on deposits will also encourage consumer spending in China, another way to reduce imbalances.

“We’re going to encourage China to move more quickly in lifting the ceiling on interest rates on bank deposits in order to put more money into Chinese consumers’ pockets,” Loevinger said at a briefing last week in Washington.

Limited Gains

Investors are betting the yuan’s rise may be limited over the next 12 months. Twelve-month non-deliverable yuan forwards dropped 0.81 percent last week to 6.3520 per dollar on May 6, their biggest weekly loss of the year, on speculation that China won’t allow faster appreciation to reduce inflation.

John Frisbie, president of the U.S.-China Business Council, said support for a stronger yuan among Chinese leaders has increased in the past year.

“The strong hand has switched over to those who are saying that the exchange rate can help us fight inflation,” Frisbie said in a telephone interview. He said his group, whose members include companies such as Apple Inc. (AAPL), JPMorgan Chase & Co. (JPM) and Coca-Cola Co. (KO), wants China to resume opening its financial services sector to allow more foreign investment.

Foreign lenders’ market share in China has dropped since the government first opened the industry in December 2006. Banks such as New York-based Citigroup Inc. (C) and London-based HSBC Holdings Plc (HSBA) want to tap household and corporate savings that reached $10 trillion in January as China overtook Japan to become the world’s second-biggest economy.

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Japan’s prime minister has told a utility to halt three reactors in central Japan because of safety concerns in the event of a major earthquake.

Prime Minister Naoto Kan told a news conference Friday his government asked operator Chubu Electric Power Co. to suspend two running reactors and a third shut for a regular inspection at its Hamaoka nuclear plant.

Kan cited experts’ forecast of a 90 percent probability of a major quake striking the region within 30 years no faxing 1 hour payday loans.

He said it was a safety measure after the crisis at the Fukushima Dai-ichi nuclear plant, which was crippled by an earthquake and tsunami March 11.

Residents have long demanded suspension of the Hamaoka reactors.

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A pair of foreclosed properties on the southern edge of the Union Station shopping and hotel complex are headed for auction later this month.

The Power House Office Building and Theatre, at 401 South 18th Street; and the Grand Central Office Building, at 415 South 18th Street, will go on the block Tuesday.

Both buildings are at the foot of the 18th Street bridge.

Bidding is scheduled to last two days.

Auction.com, the auctioneer, said bids for each property will begin at $400,000.

The Power House building, originally valued at $7.5 million, also includes a one-story movie theater.

Built in 1904 to supply power for the adjacent rail depot, the 112,281-square-foot structure currently has an occupancy rate of 77 percent.

Its tenants include radio studios, an architectural firm and a marketing agency.

The Grand Central building, at 65,852 square feet, was originally valued at $8.7 million. It houses a government office, trade association and legal counsel.

Real estate records show the owner of the buildings, St. Louis Station Partners, defaulted on loans of $5.78 million on Grand Central and $4.65 million on the Power House in 2008.

The office spaces now operate under a holding company controlled by the lender, JP Morgan Chase.

Interested parties can register to bid on the properties at auction.com.

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Investors are paying the smallest discounts for Treasuries other than the newest, most-traded bonds since the start of the financial crisis, a sign of growing demand even as the Federal Reserve’s $600 billion buying program approaches its conclusion.

Yields on older notes with 10 years left to maturity have fallen to within 11.4 basis points, or 0.114 percentage point, of those on the newest securities of the same maturity, down from the peak of 66.1 in January 2009, according to data from Barclays Plc. The gap for so-called off-the-run notes narrowed to as little as 6.6 basis points in February, the least since May 2007.

While investors typically pay the most for benchmark Treasuries, the shrinking gap suggests that U.S. borrowing costs are unlikely to soar when the central bank’s second round of so- called quantitative easing ends in June. The Barclays data show that the spread in yields is less now than in the five years before the credit crisis began in 2007.

“There will not be major disruptions in the functioning of the Treasury market,” said Eric Pellicciaro, the New York-based head of global rates investments at BlackRock Inc., which manages about $3.56 trillion in assets. Participation in the Treasury market will “remain high, if not higher,” he said.

No Concern

Goldman Sachs Group Inc. economists said last week they don’t expect an increase in yields after the Fed exits the market, while Credit Suisse AG fixed-income strategists said Treasury rates may fall as traders reverse bets on a decline.

“We are not concerned about the end of QE2,” the Credit Suisse strategists led by Carl Lantz in New York wrote in the report. “Our base case is that rates will tend to rally around the end of the program.”

Treasuries gained last week, with the yield on the benchmark 10-year note falling 17 basis points, or 0.17 percentage point, to 3.41 percent, according to Bloomberg Bond Trader prices. The decline was the biggest since yields fell by the same amount in the five days ended Feb. 25. The price of the 3.625 percent security due February 2021 rose 1 13/32, or $14.06 per $1,000 face amount, to 101 25/32.

The rate was little changed today at 3.42 percent as of 6:02 a.m. in London.

The yield on the 9.875 percent note sold in November 1985 and due in November 2015 is 16 basis points less than the benchmark 1.37 percent security issued in November 2010 and maturing in five years.

Bond Bears

The Fed said Nov. 3 it would buy $600 billion of Treasuries in an effort to spur the sluggish labor market and prevent deflation to boost the economy. Since then, Labor Department data show the U.S. has created 723,000 jobs, inflation expectations as measured by debt yields have increased and markets from stocks to junks bonds have surged.

Bond bears say the only thing supporting the Treasury market is investors seeking safety amid turmoil and uprisings in the Middle East in North Africa, the nuclear disaster in Japan following a record earthquake and tsunami, and Europe’s sovereign-debt crisis.

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, has a net short position in Treasuries, or a bet pieces will fall, according to the firm’s website. The founder of Newport Beach, California-based Pimco has eliminated Treasuries from his $236 billion Total Return Fund, saying they offer little value because of the growing U no fax payday advances.S. debt burden and the risk of accelerating inflation.

Rate ‘Pressure’

“There’s going to be roughly $75 billion a month of issuance that’s going to have to be absorbed by the market,” said David Glocke, a fund manager who oversees $65 billion of Treasuries at Vanguard Group Inc. in Valley Forge, Pennsylvania. “That should go ahead and cause some pressure on interest rates to go up.”

Ten-year yields are down from 3.8 percent a year ago and remain below the average of 5.22 percent over the last two decades even with the U.S. projected to post a deficit in excess of $1 trillion for a third-consecutive year. Yields will remain below 4 percent through year-end, according to the median forecast of 73 economists in a Bloomberg News survey.

A narrowing in the difference in yields between on- and off-the-run Treasuries comes as the Fed shifts its buying to newer issues, which account for about 90 percent of trading in U.S. government securities. More than 36 percent of the government bonds the central bank bought in March were issued within the previous 90 days, up from 15 percent in November, according to Bank of America Merrill Lynch.

Rising Volume

In another sign of demand, the volume of Treasury trading now exceeds levels before the collapse of Lehman Brothers Holdings Inc. in September 2008, according to Fed data.

Primary dealers have traded an average of $606 billion in securities each week this year, compared with $584 billion in the first eight months of 2008, central bank data shows. The amount dipped to about $410 billion per week in 2009 and $524 billion last year even as debt outstanding surged 54 percent $8.86 trillion.

Treasuries are also getting a boost from optimism that President Barack Obama and Congress are beginning to address record debt levels, according to Brian Edmonds, head of interest rates at primary dealer Cantor Fitzgerald LP in New York.

Obama, a Democrat, unveiled a plan on April 13 to cut $4 trillion in cumulative deficits within 12 years through a combination of spending cuts and tax increases. The U.S. House passed a Republican budget on April 15 that would cut spending by more than $6 trillion over a decade.

Auction Demand

“We’re starting to have a meaningful dialogue that discusses these formerly untouchable things,” Edmonds said.

Demand at Treasury auctions has risen to record levels this year, with investors submitting $3 in orders for every $1 of debt offered, data compiled by Bloomberg show. At each of last week’s auctions of three-, 10- and 30-year bonds, the so-called bid-to-cover ratio exceeded the average of the previous 10 sales.

The bond market has likely already priced in the end of QE2, according to Goldman Sachs, a primary dealer. Traders typically adjust prices when the Fed announces its buying plans rather than when it acquires the debt, Sven Jari Stehn, an economist at the firm in New York, wrote in the report last week.

“Many market participants are worried that the end of the Treasury purchases will have strongly adverse effects on bond yields and other asset prices,” Stehn wrote. “This is unlikely.”

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Employees of Liberty Mutual Group took heart in October when Missouri Gov. Jay Nixon announced their company would rake in $1.6 million in state tax credits