Europe debt crisis widens

Europe's debt crisis mushroomed Wednesday as Spain saw its credit rating lowered, just as Germany sought to reassure nervous investors that Greece would not be allowed to go under, saying Berlin's share of a key aid package could be approved in the next few days.

Stock and bond markets had begun to regain their composure after stinging downgrades of Greece and Portugal the day before, when Standard & Poor's (S&P) 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 construction 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," S&P credit analyst Marko Mrsnik 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 at around 53 per cent of national income, 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 some €8.5 billion worth of debts by May 19, but cannot raise the money in the markets given current sky-high borrowing costs.

- AP