Europe's debt crisis mushroomed Wednesday as Spain saw its credit rating lowered, just as Germany sought to reassure nervous investors that Greece would not be allowed to go under, saying Berlin's share of a key aid package could be approved in the next few days.
Stock and bond markets had begun to regain their composure after stinging downgrades of Greece and Portugal the day before, when Standard & Poor's delivered more bad news by cutting Spain's rating to AA from AA-plus amid concerns about the country's growth prospects following the collapse of a construction bubble.
"We now believe that the Spanish economy's shift away from credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," Standard & Poor's credit analyst Marko Mrsnik said.
Spain is considered the key to whether Europe's debt crisis can be resolved — its economy is much larger than that of Greece and Portugal. And many in the markets postulate that it may be just too big to bail out if it gets into serious trouble.
Though its overall debt burden is fairly modest at around 53 percent of national income, the country is running a high budget deficit and has done less than others to get a handle on its public finances.
"Given its lack of competitiveness and the grim outlook for domestic demand the government will need to announce further fiscal measures if it is to make serious inroads into the deficit," said Ben May, European economist at Capital Economics. "Today's announcement may increase the pressure on it to do this sooner rather than later."
The announcement came after a day of market drops and turmoil following the downgrades of Greece — to junk status — and Portugal. Markets had been looking for a clear word from Germany that it would contribute its part of a Greek bailout package.
The clock is ticking — Greece has to pay off some 8.5 billion euros ($11.19 billion) worth of debts by May 19, but cannot raise the money in the markets given current sky-high borrowing costs.
That means it needs its 15 partners in the euro zone and the International Monetary Fund to cough up the money promised earlier this month but Germany has been playing hardball about releasing its 8.4 billion euro share of the 45 billion euro package largely because of domestic opposition.
Germany's finance minister Wolfgang Schaeuble said Wednesday that Europe's biggest economy could have its contribution approved by parliament by the end of next week — that's the first solid timeline from Berlin aimed at easing the uncertainty that Greece might not get the money in time.
Schaeuble said that if talks with Greece and the IMF are concluded by this weekend, Germany's support measures could be brought to lawmakers Monday and fast-tracked to be approved by May 7, next Friday.
"The stability of the euro is at stake. And we're determined to defend this stability as a whole," Schaeuble said following talks with IMF chief Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet.
Chancellor Angela Merkel stressed that Germany was still insisting Greece commit to cutbacks. German assistance for Greece is unpopular with the German public and Merkel faces key regional elections May 9.
"Germany will make its contribution but Greece has to make its contribution," she said.
Strauss-Kahn would not confirm reports that he had told German lawmakers Greece may need between 100 billion euros and 120 billion euros over the next three years, saying he would not comment on any figures as long as negotiations in Athens are still under way.
Speaking during a cabinet meeting Wednesday, Greek Prime Minister George Papandreou said that every EU member must "prevent the fire that intensified through the international crisis from spreading to the entire European and global economy."
Papandreou insisted Greece was determined to bring its economy into order.
"We will show that we do not run away. In difficult times we can perform — and we are performing — miracles," he said, adding that "our government is determined to correct a course that has been followed for decades in a very short time."
In the meantime, stocks sagged and markets sold off Greek bonds with a vengeance. Investors appeared to anticipate Athens would eventually have to default or restructure its debt payments at some point even if the bailout gets it past May 19, when it has debt coming due.
A key indicator of risk — the interest rate gap, or spread between Greek 10-year bonds and the benchmark German equivalent — narrowed Wednesday afternoon to 5.9 percentage points after hitting an astonishing 9.63 percentage points, a massive jump from around 6.4 percentage points on Tuesday. The bigger the spread, the greater the fear Greece will default.
Authorities in Athens halted short-selling of stocks for two months, helping the exchange finally climb after a five-day losing streak. The ban will remain in force until June 28.
It closed up 0.63 percent at 1,707.35.
In Lisbon, Portugal's Prime Minister Jose Socrates and the leader of the main opposition party agreed on measures to help steer the country out of a financial crisis that threatens to engulf the euro zone's poorest member. The pair held emergency talks Wednesday as the Lisbon stock market recorded steep losses for a second straight day.
Socrates said, after the meeting, that the government and opposition would work together.
"We are ready to do whatever it takes to meet our budget targets," he said.
Still, the specter of the contagion spreading was prevalent.
"There is a very serious risk of contagion, it's something like post-Lehman period. Everybody is panicking and there is a lot of fear in the market," Nicholas Skourias, chief investment officer at Pegasus Securities in Athens told AP Television News. He was referring to the 2008 collapse of U.S. investment bank Lehman Brothers, which sped up the world financial crisis.
"I think that today we will have a lot of pressure as well because there is this fear of contagion."
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