The euro slid further amid fears that Greece's debt crisis would spread across the continent after a ratings agency warned yesterday that contagion could hit banks in weaker countries.
Spain saw its borrowing costs rise ominously at a debt auction and markets looked for some form of extra help from the European Central Bank (ECB).
Credit ratings agency Moody's Investor Service said the banking systems in Portugal, Italy, Spain, Ireland and Britain could all be hurt by a widening debt crisis.
PHOTO: AFP
With Spain seeing its borrowing costs jump in its latest bond issue — a clear sign of market fear, since investors demand higher rates from borrowers they see as riskier — Europe remained delicately poised at a juncture.
Moody's said much depended on bailout loans agreed for Greece and whether markets believed they would be decisive in keeping the country away from bankruptcy. Greece faces a May 19 repayment date and the loan money is expected to get there after approval by national parliaments, but its longer term prospects are less certain.
“A key factor determining whether contagion risk continues in this case will be the market's view of the likely success or otherwise of the recently agreed International Monetary Fund and European Union support package for Greece,” Moody's said.
That bailout offers the debt-ridden country 110 billion euros (US$142 billion) in loans over three years from the IMF and the other 15 countries that use the euro.
Greek lawmakers were to vote yesterday on austerity measures required by the rescue and the bill was widely expected to pass despite violent protests that culminated in three deaths on Wednesday when protesters torched a bank.
Parliament in Germany, where the bailout is unpopular, is expected to vote today and German Chancellor Angela Merkel's governing coalition appeared to have the votes to pass it, with even opposition politicians signaling support.
The euro, which would take a severe blow in the event of a government default, sagged 0.7 percent to US$1.2739. It was as high as US$1.51 late last year, before the Greek crisis worsened.
Against that sort of backdrop, and after months of delay in which Greece's debt crisis threatened to spiral out of control, European leaders have been stressing their willingness to act in support of their 11-year-old project in sharing a currency.
Merkel and French President Nicolas Sarkozy said in a letter published in the daily Le Monde that they were “fully committed to preserve the solidity, stability and unity of the euro zone.”
They said Europe must take “all measures necessary” to ensure such a Greek-style crisis doesn't happen again. In the short term, however, experts believe that the immediate task of containing the crisis depends on the bailout and whatever new policies the European Central Bank adopts.
After the ECB announced, as widely expected, that it had left interest rates at a record low, analysts were waiting for comments from ECB President Jean-Claude Trichet at a press conference.
They were keen to see whether the bank decides to take bolder steps, such as buying government bonds to prop up debt markets and banks. It has already dropped the ratings requirement for banks using Greek bonds to get short-term central bank credits, key support for Greece and the banking system in case Greece's credit is downgraded further.
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