European officials travel to Washington this week seeking a bigger global war chest to combat the debt crisis as Spain’s government battles to quell renewed market turmoil over its finances.

Three weeks after European leaders unveiled emergency euro- area funding exceeding the symbolic $1 trillion mark, concerns about Spain’s position have ratcheted the nation’s borrowing costs to the highest levels this year. Crisis-fighting resources will dominate talks at the International Monetary Fund’s spring meeting in Washington from April 20-22.

While the U.S. insists that Europe can overcome the crisis using its own financial firepower, euro-area officials say they’ve done enough to trigger additional global assistance. The urgency was underscored last week as Spanish and Italian yields jumped, challenging assumptions among the region’s leaders that the worst of the fallout was behind them.

“After three months that were calmer than expected, the euro crisis is back,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The speed of the recent surge in yields has elements of a renewed market panic.” 

Spain’s 10-year bond yield climbed 19 basis points last week to 5.98 percent, while similar-maturity Italian yields increased seven basis points to 5.52 percent. The euro retreated against the U.S. dollar April 13, falling 0.8 percent to $1.3078, bringing the decline since Feb. 28 to 2.4 percent.

The surge in borrowing costs prompted Spain’s deputy economy minister, Jaime Garcia-Legaz, to call on the European Central Bank to resume its direct intervention in the markets.

“They should step up purchases of bonds,” Garcia-Legaz said in an April 13 interview, wading into a debate that has split the ECB. While Executive Board member Benoit Coeure signaled April 11 the ECB may buy up Spanish bonds, his Dutch colleague Klaas Knot said two days later that the ECB is “very far” from reactivating the measure.

Spanish Prime Minister Mariano Rajoy, who is pushing through an austerity agenda targeting spending on health and education, won backing from his party’s regional leaders over the weekend. People’s Party chiefs from regions including Madrid, Valencia and Galicia agreed to streamline bureaucracy and write deficit targets into budget laws.

“We need to manage a reality that is very tough,” Maria Dolores Cospedal, the deputy party head and president of Castilla La Mancha, told reporters after a party meeting. Rajoy’s government has struggled to convince investors after last month saying it would not meet budget deficit targets set by the European Commission and the previous government.

European governments are banking on a bigger safety net to soothe markets as the crisis continues to simmer, with Spanish borrowing nearing the level that prompted Greece, Ireland and Portugal to seek bailouts. Sentiment will be gauged again on April 19, when Spain auctions two- and 10-year debt.

The Europeans’ appeal for funds may find more success after IMF Managing Director Christine Lagarde last week scaled back her request for $600 billion in new contributions. Lagarde said April 12 that she is hoping to make “real progress” at this week’s meetings. She has also said the IMF needs more cash to quell economic risks separate from Europe’s woes, such as higher oil prices and slowing U.S. growth.

Her retooled strategy reflects international and particularly U.S. reluctance to deliver more cash amid suspicion Europe isn’t doing enough to save itself. The IMF has less than $400 billion available to lend.

Bowing to international pressure to do more while stopping short of a bolder proposal, European governments agreed last month that 500 billion euros ($654 billion) in fresh money would be placed aside 300 billion euros already committed to create an 800 billion-euro defense against contagion.

By also offering to give the IMF 150 billion euros, “European governments have done their part,” ECB Executive Board Member Joerg Asmussen said April 13. “I would now expect our non-European friends and partners to contribute their part to IMF resources.”

Foreign governments have been slow to rally, although emerging markets including Brazil and Mexico have indicated they are willing to participate.

Japanese Finance Minister Jun Azumi said April 11 that “if we’re asked if we’re 100 percent satisfied with Europe’s efforts, I would say they need further efforts.” U.S. Treasury Secretary Timothy F. Geithner has already ruled out more support for the IMF from its largest shareholder, saying last month the lender already has “substantial financial resources.”

After spending or committing at least 386 billion euros to bailing out Greece, France and Ireland, Europe now has the money to fully finance Spain through the end of 2014 if needed, according to Schmieding at Berenberg Bank. Italy ― with a sovereign debt of 1.9 trillion euros ― is not so easily saved and would require the ECB to intervene if faced with an investor revolt, he said.

Added to the mix are the looming French presidential elections, with the first round due on April 29. EU officials and investors will be looking to see how the Franco-German partnership could be altered if Socialist candidate Francois Hollande beats President Nicolas Sarkozy in the second-round vote on May 6.

Both candidates addressed supporters in Paris Sunday after Hollande extended his advantage in a possible head-to-head race by two points to 56 percent against 44 percent, according to a TNS Sofres survey published April 13.

“France faces a highly intriguing election, which could add to market woes,” Jim O’Neill, chairman of Goldman Sachs Asset Management, wrote in an e-mailed note to clients. 

(Bloomberg)