There were fears today that more EU countries could follow Greece into a financial crisis after a global finance chief warned of economic “contagion” spreading across Europe.
The head of the International Monetary Fund urged politicians to finalise a bail-out for the debt-laden Mediterranean country, saying that every day lost in resolving the problems risked spreading the impact “far away”.
Dominique Strauss-Kahn’s comments yesterday came amid more evidence of Europe’s mounting fiscal problems after Spain’s debt was downgraded – a move recently applied to its under-pressure neighbour Portugal as well as Greece.
Germany was last night holding out for more economic reforms from Greece before agreeing to an unprecedented multi-billion euro bail-out plan.
Chancellor Angela Merkel said she wanted to see more tough measures from Athens to put the brake on soaring deficit levels before making a final commitment.
Germany will be the biggest single contributor to the €30bn of loans being prepared for the Greeks, and Mrs Merkel has one eye on crucial regional elections in Germany on May 9.
She is also sensitive to a hostile electorate deeply opposed to handing out German taxpayers’ money to Greece.
Yesterday the economic turmoil saw interest rates hit 11.3% for 10-year Greek bonds – another all-time high for a eurozone country – reflecting investor concern about their reliability. The euro also slumped to a one-year low against the dollar, of 1.3146 dollars.
Earlier the European Commission attacked the downgrading of Greek debt to the level of “junk” as not in touch with reality, pointing to the €30bn aid package – plus half as much again from the International Monetary Fund – as a sign of Europe’s ability to pull Greece back from the economic brink.
The “junk” tag pinned on Greek debt by respected rating agency Standard and Poor’s further weakened the euro and raised fears that the currency’s slump would spread from Greece to other struggling eurozone economies such as Portugal and Spain, who would also expect hand-outs from more stable eurozone countries.
In Brussels plans were under way for an emergency summit on the crisis, but not until May 10 – just nine days before Greece must find about €8.5bn or default on its debts.
European Council president Herman Van Rompuy, who will chair the summit, talked up the euro yesterday, insisting the negotiations over the Greek bail-out were on course, and there was no need to restructure Greek debt.
But the bail-out can only go ahead if the 15 eurozone countries propping up Greece agree – and Mrs Merkel can only justify doing so if she can force tougher Greek economic reform efforts in return.
The problem for the Greek government is growing public unrest over drastic spending cuts and tax rises.
Mr Strauss-Kahn, in Berlin with European Central Bank chief Jean-Claude Trichet to press the urgency of the situation, urged German MPs to play their bit to restore the euro’s credibility by approving Germany’s stake in the bail-out - between €8-9bn euros.
He said: “We also need to restore confidence... I’m confident that the problem will be fixed. But if we don’t fix it in Greece, it may have a lot of consequences on the European Union.”
Speaking during a Cabinet meeting yesterday, Greek prime minister George Papandreou said every EU member must “prevent the fire that intensified through the international crisis from spreading to the entire European and global economy”.
He also 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,” Mr Papandreou said, adding that “our government is determined to correct a course that has been followed for decades in a very short time”.
Standard & Poor’s yesterday downgraded Spain’s debt to AA from AA+. The agency said Spain’s growth prospects were weak after the collapse of a credit-fuelled housing and construction bubble.