Contagion Fear Hits Spain

Cut to Credit Rating Opens New Phase in Crisis as Cost of Greece Bailout Debated

By MARCUS WALKER And NEIL SHAH Agence France-Presse/Getty Images Disgruntled applicants for civil-sector jobs block the entrance to the finance ministry in Athens Wednesday. BERLIN—A cut to Spain's credit rating on Wednesday, just one day after downgrades to Portugal and Greece, fueled fears that the euro zone's debt crisis is widening and sent new tremors through financial markets. Chiefs of the International Monetary Fund and the European Central Bank went to Berlin to exhort reluctant German lawmakers to support the IMF-European Union rescue package for Greece. According to German officials, IMF head Dominique Strauss-Kahn said the aid could total up to €120 billion ($158 billion) over three years—nearly three times the amount recently pledged. A Greek official said the IMF is considering increasing loans to Greece, but expressed doubts about whether the boost would happen. Meanwhile, Europe's hopes of containing the crisis dimmed as Greece's debt woes spread to Portugal, sparking a market selloff across the globe. Charles Forelle, Thorold Barker and Evan Newmark discuss. Mr. Strauss-Kahn wouldn't confirm or deny that, saying that negotiations with Greece were continuing and that there was no decision on the numbers. Previously, EU authorities had said only that the euro zone and the IMF would lend Greece around €45 billion in the first year of a three-year program. German lawmakers said Mr. Strauss-Kahn put the package at €100 billion to €120 billion over three years. Meanwhile, German Finance Minister Wolfgang Schäuble said an agreement with Greece on the terms of aid could be reached by this weekend, allowing Germany's parliament to pass the necessary legislation by May 7. EU leaders are expected to sign off on the aid package on May 10, so that Greece can receive funds in time for its large bond repayments due on May 19. Journal Community After Tuesday's rout in European markets, the downgrade in Spain's credit rating spurred nervous investors in Europe to unload more stocks and bonds tied to debt-laden countries on the euro-zone's periphery. The jitters spread to Europe's corporate debt markets, where the cost of insuring against debt defaults by European companies jumped. In the U.S., the news on Spain sparked a brief selloff in stocks, sending the Dow Jones Industrial Average into negative territory before recovering to close up 53.28 at 11045.27 on news from the Federal Reserve that interest rates will remain low for some time. Greece remained at the heart of market woes. The cost of insuring $10 million of Greek government debt against default for five years jumped to more than $900,000, from $824,000 on Tuesday, signaling extreme fear of a default, before falling to $760,000 by evening in London, according to CMA DataVision. That respite was sparked by the news that the aid package for Greece could be significantly larger than expected and by assurances from senior EU and German officials that it won't involve restructuring Greece's debt. The IMF appears to hope that signaling a willingness to offer Greece roughly three times what it and the EU have already pledged will achieve what their previous efforts have failed to do—assuage investor concerns about a default. During the global financial crisis, the U.S. and many European countries were successful with a similar strategy, pledging huge sums to backstop their banks. A program of up to €120 billion could mean that Greece doesn't need to borrow from capital markets again until 2012, giving the country more time to convince investors that it can repair its budget deficit. However, hurdles remain: The deal will only be finalized if Greece commits to stiff austerity policies over three years, and the IMF and euro-zone governments give their approval. Political bickering over the Greek bailout in Germany, where aid for Athens is deeply unpopular, has been a major source of the uncertainty roiling financial markets in the past week. Chancellor Angela Merkel's government, which faces an important regional election on May 9, has sought to reassure voters at home that it is being tough on Greece, dragging out EU talks on aid in recent months. Germany, Europe's biggest and financially strongest economy, is essential to a euro-zone rescue package. Mr. Strauss-Kahn and ECB President Jean-Claude Trichet on Wednesday warned leaders of German political parties in Berlin that the euro zone could face an even bigger crisis if Germany's parliament delays the expected Greek aid package. "Every day that is lost, the situation is growing worse and worse, not only in Greece but in the European Union," Mr. Strauss-Kahn said at a news conference. Europe's Debt Crisis Take a look at events that have rattled European governments and global markets. View Interactive Growing Apart Take a look at the premium in percentage points that selected euro-zone governments must pay on their 10-year bonds. View Interactive Sortable Table: Who Pays What for Greece More photos and interactive graphics Mr. Trichet said Greece's fiscal problems are "a very special case," but that the stability of the whole euro zone is at stake. "It is extremely important that the decision is taken extremely rapidly," Mr. Trichet said, adding: "That calls for a fast procedure in the German parliament." EU President Herman Van Rompuy and Germany's Mr. Schäuble said a debt restructuring for Greece isn't on the table. Mr. Schäuble rejected demands from German lawmakers that banks should pay part of the cost of bailing out Greece, saying a debt restructuring would destabilize the situation further and is "not an issue" in the EU-IMF talks with Athens. While Europe lumbers toward arranging aid for Greece, financial markets are increasingly focused on whether other euro-zone countries will be unable to cope with their fast-rising debts. Standard & Poor's Ratings Services, which cut Spain's debt rating by one notch to double-A from double-A-plus on Wednesday, said the country's poor growth outlook in coming years will make it hard for it to repair its public finances. S&P also warned of possible further downgrades. Only on Tuesday, S&P downgraded Greece's debt to "junk" status and cut Portugal's credit rating sharply, triggering heavy selling of the euro and on bonds of other indebted euro-zone members. Spain, unlike tiny Greece or Portugal, is a large and important part of the euro-zone economy, and a full-blown debt crisis in Spain would severely test Europe's capacity to mount a rescue. Economists say Spain is still some way from needing a bailout like Greece, as Spain's overall public debt is relatively low despite the country's gaping budget deficit. The IMF expects Spanish public debt to reach around 67% of gross domestic product this year, compared with 124% in Greece. View Full Image AFP/Getty Images German lawmaker Jürgen Trittin said IMF chief Dominique Strauss-Kahn said the rescue plan was likely to total between €100 billion and €120 billion. But countries' individual circumstances might count for little if the Greek mess isn't resolved quickly and decisively, economists warn. "Markets tend not to discriminate as much when there's panic," says Ken Wattret, European economist at BNP Paribas in London. S&P said it cut Spain's credit rating because it expects the Spanish economy to grow by only 0.7% on average until 2016, lower than previous forecasts. Sluggish growth hurts tax revenues and pushes up spending on jobless benefits, making it harder for a country to balance its budget. Spain's deputy finance minister José Manuel Campa said in an interview that S&P's growth prediction was too pessimistic and "outside the range of all the analyst forecasts I've seen." Spain'shigh bond yields are "temporary" and reflect the situation in Greece, making it vital to resolve the Greek crisis quickly, Mr. Campa said. —Jonathan House contributed to this article.

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