Spain has credit rating lowered

Europe's debt crisis mushroomed today as Spain had its credit rating lowered, just as Germany tried to reassure nervous investors that Greece's economy would not be allowed to go under.

Stock and bond markets had begun to regain their composure after downgrades of Greece and Portugal the day before, when Standard & Poors delivered more bad news by cutting Spain's rating to AA from AA+ amid concerns about the country's growth prospects following the collapse of a property bubble.

"We now believe that the Spanish economy's shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," Standard & Poors 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 - may be just too big to bail out if it gets into serious trouble.

Though its overall debt burden is fairly modest, 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 €8.5bn debts 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 to cough up the money promised earlier this month but Germany has been tough about releasing its €8.4bn share of the €45bn package largely because of domestic opposition.

Germany's finance minister Wolfgang Schaeuble said today it could have its contribution approved by parliament by the end of next week - the first solid timeline from Berlin aimed at easing the uncertainty that Greece might not get the money in time.

"The stability of the euro is at stake. And we're determined to defend this stability as a whole," Mr Schaeuble said following talks with IMF chief Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet.

Speaking during a cabinet meeting, 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."

Mr Papandreou insisted Greece was determined to bring its economy into order.

In the meantime, stocks sagged and markets eagerly sold off Greek bonds. 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 May 19, when it has debt coming due.

In Lisbon, Portugal's Prime Minister Jose Socrates and the leader of the main opposition party agreed on measures to help steer the country out of a financial crisis that threatens to engulf the euro zone's poorest member.

The pair held emergency talks as the Lisbon stock market recorded steep losses for a second straight day.