A day after rating agency Standard and Poor's slashed Greek debt to junk status, the premium investors demand to hold Greek government bonds jumped on Wednesday to reach its highest in 14 years.
European shares fell on Wednesday, as worries over the fiscal health of euro zone peripheral countries intensified after Standard & Poor's downgraded its debt rating on Spain by one notch.
S&P also downgraded Portugal, raising concerns the crisis may spread to other indebted states on the eurozone fringes.
"It seems to be one (downgrade) after the other. Only a few months ago it looked like it was contained to Greece and in the last 24 hours we are seeing the contagion effect having a firm grip across Europe," said Manoj Ladwa, senior trader at ETX Capital in London.
French economy minister Christine Lagarde played down the prospect of contagion in the euro zone. "The situation in Portugal is not the same as in Greece. The debt level is important but the Portuguese did not lie (about their finances)," she said.
ECB’s Stark says onus is on governments
"The chances of a default by the Greek government are increasing not by the day but by the hour. If the IMF and European governments don't come up with something quickly, then I see the market going down further quite rapidly," said Koen De Leus, economist at KBC Securities.
European Central Bank Executive Board member Juergen Stark warned the situation threatened to develop into a full blown sovereign debt crisis.
"The current trend in fiscal policies is simply not sustainable. ... The onus is now on governments to ensure that the crisis that initially affected the financial sector, and subsequently the real economy, does not lead to a full-blown sovereign debt crisis," Stark said.
"Averting it will require very ambitious and credible fiscal consolidation efforts. In fact, substantially stronger consolidation efforts than those conceived so far."
Aid amount unclear
Bailout talks between Greece, European authorities and the International Monetary Fund began in Athens last week, after Greece asked for as much as 45 billion euros in emergency loans from euro zone governments and the IMF this year.
Greek and European Commission officials have said the first tranche of aid will be paid before May 19, when Athens will need to refinance a maturing 8.5 billion euro bond.
But as market pressure on Greece has intensified, signs have grown it would need much more than the 45 billion euros already committed in aid.
The Financial Times reported the IMF is considering raising its contribution by 10 billion euros to 25 billion euros.
European Union President Herman Van Rompuy said he would convene a summit of euro zone countries around May 10 and insisted there would be no restructuring of Greek debt. "Negotiations are going on, they are well on track, and no question about restructuring of the debt," he told a news conference in Tokyo.
Germany focuses attention
But markets are not convinced that governments will have the political will to reach and sustain an agreement on the aid, especially in Germany, where public opinion is strongly against helping Greece and where Chancellor Angela Merkel's party risks defeat in a regional election on May 9.
ECB President Jean-Claude Trichet and IMF chief Dominique Strauss-Kahn were due to brief German political leaders later on Wednesday on the latest plans to help Greece.
Members of Merkel's Christian Democrats (CDU) said on Tuesday they would raise the subject of forcing investors to take a discount on Greek debt.
Chancellor Angela Merkel said on Wednesday a long-term solution, not a quick fix, was needed for Greece and that Athens could not be allowed to suffer the same fate as collapsed US investment bank Lehman Brothers.
Speaking after meeting the head of the International Monetary Fund, Merkel added: "We are on a good path now" towards a solution of debt-ridden Greece.
(EurActiv with Reuters).
