Angela Merkel moved to halt the deepening crisis in the euro yesterday by pledging German support for a controversial Greek bailout package.
Despite her actions, fears that the shockwaves from Greece's debt crisis were spreading to the continent's other ailing economies grew after the credit rating agency Standard and Poor's downgraded Spain's rating. The risk of a wholesale collapse in the value of government bonds issued by the weaker eurozone nations is now becoming more real, and threatening the fragile recovery across the EU.
The German Chancellor promised support for Athens after an urgent crisis summit in Berlin with the heads of the International Monetary Fund and the European Central Bank – the two key architects needed for any Greek rescue deal – as markets tried to recover from a dramatic slide sparked by the Greek debt.
"It is a question of the euro's stability," Ms Merkel told reporters. "We cannot avoid this responsibility. Trust in Greece must be restored. Germany will play its part but Greece must make its contribution as well," she added.
The German Chancellor hosted the Berlin summit with the International Monetary Fund's Dominique Strauss-Kahn and the European Central Bank's chief, Jean-Claude Trichet, less than 12 hours after Standard & Poor's downgraded the Greek debt to the status of "junk", causing panic on the markets. But even as efforts were under way to calm market reactions to the Greek crisis, the agency then downgraded Spain's rating from AA+ to AA.
The government downplayed the setback. José Manuel Campa, Secretary of State for the Economy, said he was "surprised", adding that the agency's projections for Spain's growth were "very low, outside of the range of analysis we are now looking at". He said he considered it "unlikely" that other ratings agencies such as Fitch and Moody's would adjust their ratings as well.
In Germany Ms Merkel was placed under intense pressure to agree to a quick solution that would lead to a rapid bailout for Athens. "Trust in the Eurozone is at stake," warned Mr Strauss-Kahn, "Every day of delay makes the situation worse," he added.
By yesterday afternoon the situation appeared to have stabilised following major falls on the European markets. Stocks in Paris and Frankfurt fell by 2 per cent yesterday morning, while Spain's leading index dropped by 3.3 per cent. "The market is now looking at every country with a lot of curiosity," said Gilles Moec, a senior economist with Deutsche Bank.
The decision on Spain reflects concern that is potentially far more significant than the warnings about Greece and Portugal, both comparatively small Eurozone economies. Spain, by contrast, is the fourth-largest zone's economy behind Germany, France and Italy.
As the euro fell to a new one-year low against the US dollar, it emerged in Berlin that the scale of the Greek debt problem had increased dramatically because several of the poorer EU members states were too indebted to be able to contribute. Both the ECB and IMF heads revealed to German MPs that they needed to increase spending on the rescue package to a figure ranging from between €120bn-€135bn over the next two to three years.
"The plan envisages removing Greece from the financial markets for three years," said the German Green party leader Jürgen Trittin, one of the MPs at the meeting. The previous figure cited in Germany as needed for the Greek bailout had been €45bn, with Berlin providing €8.4bn for 2010. But the new figure for Germany's contribution was put at €25bn yesterday.
Wolfgang Schäble, the German Finance minister, said that his government would make every effort to hold a parliamentary vote on German funding for the Greek rescue package by Friday of next week after negotiations had been held with the European Commission, the IMF and the ECB.
But the prospect of a payout for Greece three times higher than the amount previously discussed was certain to inflame public opinion in Germany, which was already hostile. An opinion poll conducted by Germany's Ntv news channel yesterday showed that 92 per cent of respondents were opposed to a Greek bailout. The country's mass circulation Bild newspaper ran a banner headline exclaiming "Greek debt is junk" alongside a photograph of striking Greek workers and the words, "We don't want to save!"
The constantly changing picture of the euro crisis saw European stock markets endure a roller-coaster ride yesterday. Share prices fell to a seven-week low in the early hours of trading. They recovered with the show of support in Berlin only to fall again on news of Spain's lower credit rating.
On the debt markets, the interest rate paid by two-year Greek government bonds ballooned to an unheard-of 38 per cent in the morning.
In the UK, the FTSE 100 index of blue chips, which slumped by 2.6 per cent on Tuesday, fell by another 1.2 per cent in early trading. Banking shares suffered as investors began to fret about the sector's exposure to Greece.
UK shares later moved into positive territory and Greek bond yields began to retreat. But hopes of a positive ending were dashed after the ratings agency Standard & Poor's made its move two minutes before the end of business.
The Greek debt crisis could hardly have come at a worse time for the German leader. She faces a key regional election in just over a week's time. The worsening Greek-driven euro crisis is forcing her to take domestically unpopular steps to shore up the currency. A loss on 9 May could seriously destabilise her coalition government.
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