- The Washington Times - Thursday, April 29, 2010

BERLIN | 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 previous day. Then Standard & Poor’s delivered more bad news by cutting Spain’s rating to AA from AA+ amid concerns about the country’s growth prospects after 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 it may be too big to bail out if it gets into serious trouble.

Though Spain’s overall debt burden is fairly modest, about 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 $11.3 billion worth of debt 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 eurozone and the International Monetary Fund (IMF) to come up with the money promised earlier this month. But Germany has been playing hardball about releasing its $11.2 billion share of the $59.8 billion package, largely because of domestic opposition.

German Finance Minister Wolfgang Schaeuble said Wednesday that Europe’s biggest economy could have its contribution approved by parliament by the end of next week — the first solid timeline from Berlin aimed at easing the concern that Greece might not get the money in time.

Mr. 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 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 after 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 the chancellor faces key regional elections May 9.

Mr. Strauss-Kahn would not confirm reports that he had told German lawmakers Greece may need between $132.9 billion and $159.5 billion over the next three years, saying he would not comment on any figures as long as negotiations in Athens are still under way.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide