The euro slid further amid fears that Greece's debt crisis would spread across the continent after a ratings agency warned Thursday that contagion could hit banks in weaker countries.
Spain saw its borrowing costs rise ominously at a debt auction, and markets looked for some form of extra help from the European Central Bank.
Credit ratings agency Moody's Investor Service said the banking systems in Portugal, Italy, Spain, Ireland and Britain could all be hurt by a widening debt crisis.
With Spain seeing its borrowing costs jump in its latest bond issue — a clear sign of market fear, since investors demand higher rates from borrowers they see as riskier — Europe remained delicately poised at a juncture.
Moody's said much depended on bailout loans agreed for Greece, and whether markets believed they would be decisive in keeping the country away from bankruptcy. Greece faces a May 19 repayment date and the loan money is expected to get there after approval by national parliaments, but its longer term prospects are less certain.
"A key factor determining whether contagion risk continues in this case will be the market's view of the likely success or otherwise of the recently agreed International Monetary Fund and European Union support package for Greece," Moody's said.
That bailout offers the debt-ridden country 110 billion euros ($142 billion) in loans over three years from the IMF and the other 15 countries that use the euro.
Greek lawmakers were to vote Thursday on austerity measures required by the rescue, and the bill was widely expected to pass despite violent protests that culminated in three deaths Wednesday when protesters torched a bank. Parliament in Germany, where the bailout is unpopular, is expected to vote Friday and Chancellor Angela Merkel's governing coalition appeared to have the votes to pass it, with even opposition politicians signaling support.
The euro, which would take a severe blow in case of a government default, sagged 0.7 percent to $1.2739. It was as high as $1.51 late last year before the Greek crisis worsened.
Against that sort of backdrop, and after months of delay in which Greece's debt crisis threatened to spiral out of control, European leaders have been stressing their willingness to act in support of their 11-year-old project in sharing a currency.
Merkel and French President Nicolas Sarkozy said in a letter published in daily Le Monde that they were "fully committed to preserve the solidity, stability and unity of the euro zone."
They said Europe must take "all measures necessary" to ensure such a Greek-style crisis doesn't happen again. In the short-term, however, experts believe that the immediate task of containing the crisis depends on the bailout and whatever new policies the European Central Bank adopts Thursday.
After the ECB announced, as widely expected, that it had left interest rates at a record low, analysts are waiting for comments from President Jean-Claude Trichet at a press conference. They are keen to see whether the bank decides to take bolder steps, such as buying government bonds to prop up debt markets and banks. It has already dropped the ratings requirement for banks to use Greek bonds to get short-term central bank credits, key support for Greece and the banking system in case Greece's credit is downgraded further.
"No doubt that today's ECB meeting will be centered on Greece and the growing contagion effect that is taking place in the euro sovereign bond market," said analyst at Credit Agricole CIB.
They do not expect the bank to announce bond purchases "but Trichet's responses to questions at the press conference will be examined even closer than usual."
An improvement in market sentiment will be needed if borrowing costs are to be kept in check — Spain's latest 5-year bonds were issued at an interest rate of 3.58 percent, up from 2.84 percent in the last auction as recently as March.
Moody's warning on contagion came only a day after it put Portugal on watch for a possible downgrade of its sovereign debt and a week after rival Standard & Poor's downgraded Greece's government bonds to junk status.
Moody's said the banking systems of Portugal, Italy, Spain, Ireland and Britain all face challenges of different types, but warned that "contagion risk could dilute these differences and impose very real, common threats on all of them."
The banking systems of Portugal and Italy, like that of Greece, were not hit too hard by the global financial crisis, but their huge public debt load remains a threat. Banks in Spain, Ireland and the U.K. were more exposed to the credit crunch and have weakened their countries' finances significantly over the past year, the agency said.
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