Spain reels, Greece strikes in eurozone crisis

19th October 2011, Comments 0 comments

Spain reeled from a new debt downgrade and Greek workers launched a general strike to stop austerity cuts Wednesday, raising the stakes for a pivotal eurozone crisis summit.

The twin blows underscored daunting challenges facing the eurozone, which is struggling to slash costs at the same time as preventing its flagging economies from plunging into recession.

For investors the underlying concern is that major European economies' sovereign debts are no longer risk-free.

Moody's highlighted those strains late Tuesday, slashing Spain's rating by two notches to A1 from Aa2, with a negative outlook, just days after a similar move from Standard & Poor's.

Describing a now familiar malaise of slow growth and crushing private and public debt, Moody's in effect issued a vote of no confidence in Spain and the European Union's handling of the crisis so far.

"Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area's political cohesion and growth prospects to be fully restored," it warned.

"In the meantime, Spain's large sovereign borrowing needs as well as the high external indebtedness of the Spanish banking and corporate sectors render it vulnerable to further funding stress."

Moody's announcement came two weeks after the agency downgraded the debt of Italy and a day after it warned that even France's AAA-rated sovereign debt rating may be cut.

In Greece, struggling to meet conditions imposed in return for an international 110-billion-euro ($151-billion) rescue programme last year, workers came out in force against new cuts.

Thousands of protesters marched in Athens at the start of a two-day general strike joined by most professions against a new austerity bill demanded by the European Union and IMF to avert bankruptcy.

As the bad news piled up ahead of a weekend European Union summit on the eurozone's troubles, French President Nicolas Sarkozy warned of the scale of the challenge.

"The world and Europe are going through an unprecedented financial crisis," he said in Nice on Tuesday.

"This crisis is going to lead us in the days ahead to take important, very important decisions," the French leader said.

France would defend Europe's heritage, he vowed.

"Allowing the destruction of the euro would be to take a risk of destroying Europe," Sarkozy said.

Soledad Pellon, analyst at Spanish brokerage IG Markets, warned that a downgrade of French debt would reverberate across the eurozone.

"From our point of view removing France's AAA rating would be a very bad decision because Germany and France are points of reference," Pellon said.

The credit rating downgrades made the European summit more pressing, Pellon added. "Of course, this adds pressure to the European leaders if they delay taking decisions," she said.

European leaders are looking at several measures they may announce this weekend as part of their efforts to end a nearly two-year-old sovereign debt crisis:

-- Rubber-stamp the release of eight billion euros of loans from a first EU-IMF bailout of Greece last year.

-- Strengthen the European Financial Stability Facility, which now has 440 billion euros but would need much more if it had to throw a lifeline to Italy or Spain.

-- Recapitalise banks to make them less vulnerable to a Greek "credit event," or default.

-- Improve coordination, possibly by backing a Franco-German plan for bi-annual summits of the 17 eurozone leaders.

-- Try to boost economic growth.


© 2011 AFP

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