European officials tried Monday to prevent the eurozone's debt crisis from spilling over into bigger economies such as Italy and Spain, as disagreements delayed a second bailout for Greece.
Intense debate over how, and how much, banks and other private investors can contribute to a new rescue package for Greece has unsettled financial markets in the currency union, most dramatically in Italy, as rating agencies warn that even a voluntary involvement will likely be seen as a partial default of Greece on its massive debts.
Though the proposals currently doing the rounds may be less severe than a Greek payment halt, for example, rating agency Moody's said in a note Monday that the "prospect of any form of private sector participation in debt relief is obviously negative for holders of distressed sovereign debt."
That warning follows a report last week from Standard & Poor's that said that even a relatively market-friendly French proposal on a voluntary rollover of Greek debt would likely trigger a "selective default" rating.
Investors are concerned that the debt crisis, which has so far been contained to the small economies of Greece, Ireland, and Portugal, could soon drag down bigger countries like highly indebted Italy and unemployment-ridden Spain. The mere size of their economies could easily overwhelm the rescue capacity of the rest of the eurozone.
Spanish Prime Minister Jose Luis Rodriguez Zapatero called for a "swift and precise clarification" of how a second bailout for Greece might work, to help ease the tension. He said the meeting of finance ministers in Brussels on Monday should "contribute to that goal."
German Chancellor Angela Merkel also urged quick action on new aid for Greece and added that Italy needs to send a "very important signal" by passing an austerity budget. She said she discussed the issue by phone on Sunday with Italian Premier Silvio Berlusconi.
"I have firm confidence that the Italian government will approve just such a budget ... and, in so doing, Italy will send a signal that it feels committed to consolidation and fighting debt," she said.
Italian Finance Minister Giulio Tremonti has proposed 48 billion euros ($67 billion) in new savings over three years and aims to cut the deficit to zero by 2014 from this year's 3.9 percent of gross domestic product. The measures must still make it through Parliament.
Italy has a heavy debt load of around 120 percent of economic output, but so far has not had any trouble borrowing to refinance it. Still, it has weak growth prospects, an expensive pension system and lagging productivity.
Most officials, however, tried to play down concerns over Italy, which has moved to the center of debate over the past days and seen its borrowing costs rise sharply, and said that there was time until September to reach a final deal on Greece.
"I have no doubt whatsoever that Italy is taking the right decisions," German Finance Minister Wolfgang Schaeuble said, referring to planned austerity measures. "All this is the normal excitement ahead of such meetings. One doesn't have to take this so seriously."
The markets were telling a different story. The yield, or interest rate, on Italian and Spanish government bonds shot up Monday, in contrast to other big economies, while the euro dropped 1.15 percent to $1.4044.
The yield on Italian 10-year bonds jumped to 5.6 percent from 5.3 percent at the beginning of trading, following sharp rises on Thursday and Friday. Shares on the Milan stock market slipped 3.4 percent.
Yields on Spanish 10-year bonds meanwhile rose to 5.9 percent from 5.7 percent.
"The fact that contagion is spreading marks the failure of politicians to draw a line under the euro-crisis to date," Rabobank analyst Jane Foley said. "As yields rise and debt financing costs become even more exaggerated the difficulties of containing the crisis become even bigger."
At the center of Monday's discussions will be whether a substantial contribution from banks to a second Greek bailout is worth letting the country temporarily slip into default.
A partial default rating may only last a "very short time," said Dutch Finance Minister Jan Kees de Jager, indicating that some ministers may be moving away from their previous assertion that a default rating must be avoided at all cost.
To stay afloat until mid-2014, Greece will need an extra 115 billion euros ($164 billion) — on top of the 110 billion euros ($157 billion) it was granted last year — according to the European Commission, although some of the money will come from privatizations.
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