Eurozone seeks to stop Greek spillover

[July 11, 2011]  BRUSSELS (AP) -- European officials are trying to work out a strategy Monday to prevent the eurozone's debt crisis from spilling over into bigger economies such as Italy and Spain, as they discuss details of 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 that a Greek payment halt, for example, 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."

Moody's 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.

The yield, or interest rate, on Spanish and Italian government bonds shot up Monday morning, in contrast to other big economies, while the euro dropped 0.6 percent to $1.412.

Yields on Spanish 10-year bonds rose from 5.7 percent at the start of trading to 5.8 percent, while the yield on Italian 10-year bonds meanwhile increased to 5.4 percent from 5.3 percent, following sharp rises on Thursday and Friday.

"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."

The threat of contagion and the wider financial market jitters are set to feature prominently in a meeting of eurozone finance ministers in Brussels Monday afternoon.

The ministers will debate whether a substantial contribution from banks to a second bailout is worth letting the country temporarily slip into default. However, senior eurozone officials warned that no decisions are expected Monday, with talks likely to drag into September.

To stay afloat until mid-2014, Greece will need an extra euro115 billion ($164 billion)- on top of the euro110 billion ($157 billion) it was granted last year -- according to the European Commission, although some of the money will come from privatizations.

Frustrated with the slow progress on Greece, European Union President Herman Van Rompuy, usually in charge of the summits of EU leaders, called in top officials -- including European Central Bank President Jean-Claude Trichet, the EU's Monetary Affairs Commissioner Olli Rehn and European Commission President Jose Manuel Barroso -- for an unscheduled get-together ahead of the finance ministers meeting.

Trichet in particular has stressed the potential negative consequences of a default rating, even a temporary one.

[Associated Press; By GABRIELE STEINHAUSER]

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