ATHENS (AFP) – Europe's debt crisis deepened after Spain was slapped with a credit downgrade and pressure mounted for urgent approval of a giant bailout for Greece that could run to 120 billion euros.
The head of the IMF warned confidence in the entire 16-nation euro area was now at stake and Greek Prime Minister George Papandreou said the EU "must prevent a fire" from engulfing the European and world economy.
|Employees walk in the Athens stock exchange. AFP photo|
But Germany, the pivotal player in any bailout as Europe's biggest economy, has said it will lend Greece the money it needs to avoid a crippling default only if Athens promises to make further budget cuts.
US President Barack Obama called German Chancellor Angela Merkel on Wednesday, with both leaders stressing the need for "resolute action" to tackle Greece's debt crisis, the White House said.
"They discussed the importance of resolute action by Greece and timely support from the IMF and Europe to address Greece's economic difficulties," it said.
IMF managing director Dominique Strauss-Kahn and European Central Bank president Jean-Claude Trichet travelled to Berlin on Wednesday to drum up support for an EU-IMF aid plan for Greece in which Germany would have to pay the lion's share.
"It is perfectly clear that the negotiations with the Greek government, the European Commission and the IMF need to be accelerated," Merkel said after meeting with Strauss-Kahn.
"We hope they can be wrapped up in the coming days and on the basis of this, Germany will make its decisions," she told reporters.
But there were signs of a hitch in the talks after Greek Labour Minister Andreas Loverdos said that Athens was resisting demands by the EU and the IMF to cut salary bonuses in the private sector.
"We have been asked for a cut which we do not accept," Loverdos told reporters.
Financial markets reeled anew, following credit downgrades for both Greece and Portugal on Tuesday that heightened investor fears that the Greek debt drama is spreading to other weakened euro nations.
The European single currency plunged to its lowest level against the dollar in more than a year and was trading at 1.3206 in early Asian trade Thursday, while bond and stock markets across much of Europe were also sharply down.
"The downgrade of Spanish government debt by S&P is another alarming sign that the effects of the Greek crisis are spreading," said European economist Ben May at research firm Capital Economics in London.
Standard & Poor's lowered Spain's long-term sovereign credit rating to "AA" from "AA+" and said the outlook was negative, meaning there could be a further downgrade.
Credit ratings are closely watched by financial market professionals as a guideline on whether or not to invest in stocks, bonds and currencies.
Spain, with an economy five times the size of Greece's, appealed to those investors.
"I want to send a message of confidence to the population and of calm to the markets," Deputy Prime Minister Maria Teresa de la Vega said, insisting that Spain was cutting its debts.
The Greek crisis has snowballed in recent months and is seen by many as a sign of things to come for other highly-indebted economies in Europe.
The current crisis is now at a crunch point as Greece has said it needs emergency loans by May 19 to avoid defaulting on its debts.
Strauss-Kahn struck an ominous note, saying: "It is the confidence in the whole zone that is at stake."
Herman Van Rompuy, the European Union's president, has convened an emergency summit of eurozone leaders for around May 10 on the debt crisis.
Two German lawmakers, who met with Strauss-Kahn and Trichet, said the size of the rescue loan package could be as high as 120 billion euros (158 billion dollars) over three years, although Merkel declined to give a precise figure.
The idea of aiding Greece is deeply unpopular in Germany, which is set to hold regional elections on May 9.
The Greek government also faces growing domestic discontent, with a wave of strikes by radio engineers and teachers erupting on Wednesday and a general strike planned for May 5.