Source: AP

Europe’s debt crisis spread its contagion to another country Wednesday when 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.

At stake is the threat of higher borrowing costs that could crimp government spending for years and undermine the once-mighty euro.

Chancellor Angela Merkel said Germany would speed up approval of its share of a nearly $60 billion (euro45 billion) joint bailout with the International Monetary Fund 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 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.

But 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 $158 billion (euro120 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.

Merkel’s government has balked at handing over German taxpayers’ money to a country that has acknowledged massaging its debt figures for years — and key regional elections in Germany on May 9 have not helped to bring about a swift resolution.

Merkel stressed that Germany was still insisting Greece commit to tough austerity measures.

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

Merkel would not comment on how much money Greece would need in the long run. “What is known … is that it will be a three-year program,” she said. “Let us talk about numbers when the program is finalized.”

The clock is ticking — Greece has to pay off some $11.3 billion (euro8.5 billion) worth of debt by May 19, but cannot raise the money in the markets given sky-high borrowing costs.

That means it needs its 15 eurozone partners and the IMF to cough up the promised nearly $60 billion (euro45 billion) in bailout funds, including Germany’s $11 billion (euro8.4 billion) share.

The downgrade for Spain was an ominous new blow, coming just as markets were recovering their poise after the double shock Tuesday of a Standard & Poor’s downgrade for Greece — to junk status — and Portugal.

Though Spain’s overall debt burden is fairly modest at around 53 percent of national income — compared to 115 percent for Greece — the country is running a big budget deficit and has done less than others to get a handle on its public finances.

The agency said 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.

“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 still has an investment grade rating, though it could wind up paying more to borrow and find itself under pressure to take tougher steps to cut spending.

“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.”

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.”

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 its most imminent hurdle — May 19.

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