Europe’s debt crisis has spread its contagion to another country as a major agency downgraded Spain’s credit rating, even as Germany grudgingly moved closer to bailing out Greece from imminent collapse.
Greece and Portugal — up to now the focus of alarm — are relative economic minnows, but Spain’s economy, at four times the size of Greece, is considered by many too big to rescue.
Standard & Poor’s said on Wednesday it was cutting Spain’s rating to AA from AA+ amid concerns about the country’s growth prospects following the collapse of a construction bubble.
At stake is the threat of higher borrowing costs that could crimp government spending for years and undermine the once-mighty euro.
German Chancellor Angela Merkel said on Wednesday that Berlin would speed up approval of its share of a nearly US$60 billion joint bailout with the IMF and other euro countries, rushing it through parliament by May 7.
That would beat a May 19 deadline when Greece has debt coming due — and which it can’t pay without a bailout.
“It’s absolutely clear that the negotiations between the Greek government and the European Commission and the IMF have to be accelerated now,” Merkel said ahead of a meeting with IMF head Dominique Strauss-Kahn. “We hope that they will be completed in the next days.”
Her remarks and a promise from German Finance Minister Wolfgang Schaeuble that the package could be signed, sealed and delivered — provided Greece agrees to tough austerity measures — helped shore up confidence the country would not suffer a disastrous default. That would make borrowing more expensive for governments across Europe.
However, the Spain downgrade and a lack of clarity about how much money Greece will really need unsettled investors. Major European markets closed down after the Spain announcement, which came in the final two minutes of trading.
Strauss-Kahn would not confirm reports he had told German parliamentary deputies that Greece would need as much as US$158 billion over several years.
Some say the very future of the euro hangs in the balance.
At minimum, a Greek default would roil the balance sheets of European banks holding Greek bonds. Higher borrowing costs would force indebted governments to pay more to cover interest costs, thus stifling spending and economic stimulus and pushing them to increase taxes. That would make it harder for Europe to maintain its shaky economic recovery.
Once again, the main actors in the Greek debt drama failed to provide complete clarity — threatening already shaky markets with further turmoil.
Royal Bank of Scotland analyst Jacques Cailloux said the statements by Merkel, Strauss-Kahn and European Central Bank president Jean-Claude Trichet “failed to provide groundbreaking information” and warned that Europe risked the “biggest coordination failure in modern history.”
Until the German parliament backs the release of bailout funds, the markets will remain “very skeptical” that EU and IMF leaders have a handle on the crisis, Cailloux said.
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