- The Washington Times - Wednesday, April 28, 2010

UPDATED:

BERLIN (AP) — Europe’s debt crisis flared again Wednesday as Spain saw its credit rating lowered, just as Germany sought to reassure markets fearful over a possible Greek financial collapse by saying its 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 on Tuesday when the Standard & Poor’s ratings agency delivered more bad news by cutting Spain’s rating to AA from AA+.

The agency said Spain’s growth prospects were weak after the collapse of a credit-fueled housing and construction bubble. The downgrade raises the ominous prospect of market contagion hitting another country’s finances.

Spain’s economy is much larger than those of Greece or Portugal, and many experts think it’s simply too big to bail out if it gets into serious trouble, as Greece has, by facing unsustainable costs to borrow money on bond markets.

“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.

The announcement came after a day of market drops and turmoil following the downgrades of Greece — to junk status — and Portugal. Markets have been looking for a clear word from Germany that it would contribute its part of a Greek bailout package.

Greece has said it can’t pay debts coming due May 19 without 45 billion euros ($59.8 billion) in bailout loans from the countries that use the euro as well as the International Monetary Fund, raising worries that the country is on the verge of financial collapse. But Germany, which would be the biggest single contributor with some 8.4 billion euros ($11 billion), has insisted that Greece agree to a lasting austerity plan before it will approve its share of support.

German Finance Minister Wolfgang Schaeuble said Wednesday that Germany could have its contribution to a Greek bailout package approved by parliament by the end of next week — the first solid time line from Berlin aimed at easing the uncertainty that Greece might not get the money in time.

Mr. Schaeuble said that Germany was sticking to its insistence that Greece commit to new austerity measures in talks with the International Monetary Fund and the European Union, but that those could be concluded by this weekend.

If so, he said Germany’s support measures could be brought to lawmakers Monday and fast-tracked to be approved by May 7.

“The stability of the euro is at stake, and we’re determined to defend this stability as a whole,” Mr. Schaeuble said following talks with IMF Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet.

Mr. Strauss-Kahn and Mr. Trichet both stressed necessity for a speedy passage of the aid package for Greece.

“The faster, the better. Every day that is lost, the situation is getting worse,” Mr. Strauss-Kahn said.

Mr. Trichet and Mr. Strauss-Kahn both said negotiations with the Greek government should be concluded by this weekend. “I’m confident,” Mr. Trichet said.

German Chancellor Angela Merkel said later that as soon as Greece wraps up negotiations, then Germany can go ahead with its approval of financial help.

“Germany will make its contribution, but Greece has to make its contribution,” she said.

Mr. Strauss-Kahn sought to allay fears that the money would never be seen again, telling reporters, “There is no program from the IMF that hasn’t been repaid.”

“It is not helping for nothing; it is a loan that will be repaid,” he said before sitting down for talks with Mrs. Merkel. “That is why this program has to be credible.”

In his earlier comments, Mr. Strauss-Kahn would not confirm reports that he had told German lawmakers Greece may need between 100 billion euros ($131.5 billion) and 120 billion euros ($157.75 billion) over the next three years, saying he would not comment on any figures as long as negotiations in Athens are still under way.

Mr. Schaeuble also declined to comment on the reports. He said the eurozone countries had made the decision to assist Greece in the three coming years, but only agreed on an aid package for the first year as of now.

Mr. Strauss-Kahn also made it clear that the austerity measures will be difficult for Greece.

“It will take time. I don’t want to hide it behind a rosy picture. It’s not easy. It’s difficult,” Mr. Strauss-Kahn said.

European Council President Herman Van Rompuy, in Toyko for meetings with Japanese Prime Minister Yukio Hatoyama, said he was fully confident that Greece will receive the financial assistance it needs in time to address its debt problems and to preserve eurozone stability.

“I would like to recall the strong commitment of the euro-area member states at the highest level to take the necessary steps to ensure financial stability of the euro area as a whole,” Mr. Van Rompuy told a news conference after meeting with Mr. Hatoyama.

Mr. Rompuy also said he plans to hold a eurozone summit by May 10 at the latest.

Speaking during a Cabinet meeting Wednesday, Greek Prime Minister George Papandreou said that every European Union member must “prevent the fire that intensified through the international crisis from spreading to the entire European and global economy.”

Mr. 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. “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 eventually would 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 about 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.

In Lisbon, Portuguese 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 eurozone’s poorest member. The pair held emergency talks Wednesday as the Lisbon stock market recorded steep losses for a second straight day.

Mr. 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.”

Associated Press writers Verena Schmitt-Roschmann, Melissa Eddy and David Rising in Berlin; Barry Hatton in Lisbon; Malcolm Foster in Tokyo; and Nicholas Paphitis and AP Television producer Nathalie Rendevski Savaricas in Athens contributed to this report.

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