Eurozone swept by fresh panic as leaders mull Greece
Jean-Claude Trichet - Photo EU Council
(BRUSSELS) - Europe's debt crisis threatened to spill over to Italy, Spain and beyond Monday, challenging eurozone finance ministers to overcome sharpening divisions over options for indebted Greece.
Meeting in Brussels to finesse a second rescue package for Athens in September, ministers from the 17-nation zone huddled as fears of debt crisis contagion rattled Italy and Spain, its third and fourth largest economies.
The euro slumped to its lowest level in six weeks, stock markets closed with heavy falls, including an almost four percent plunge in Milan, and borrowing costs rose to 12-year euro-era record highs in Spain and Italy.
"We are looking at something which is more systemic" than Greece, said Spanish minister Elena Salgado. "It concerns the stability of the eurozone in general."
With the fate of the single currency again hanging in the balance, EU finance officials were under mounting pressure to bridge a rift over the terms of a second Greek bailout and speak with a single voice.
A news conference was expected later in the evening.
After preparatory talks on Greece notably gathering European Central Bank chief Jean-Claude Trichet and Eurogroup chairman Jean-Claude Juncker, European Union president Herman Van Rompuy issued a statement saying "we also exchanged views on recent developments in the euro-area."
The statement highlighted peaking worries over debt crisis contagion after heavily indebted Italy -- with a 1.9 billion euro debt -- came under attack last week.
And in a rare move, concerned German Chancellor Angela Merkel stepped in to urge the Italian parliament to pass an austerity budget to avoid it being dragged into a debt crisis that so far has hit smaller nations, Greece, Portugal and Ireland.
The three combined represent only half the size of the Italian economy.
"The single currency has been absolutely battered today as European leaders struggle to stem the loss of confidence that they will be able to come up with a solution to the current sovereign debt crisis," said analyst Michael Hewson at CMC Markets in London.
"The news that EU leaders could be considering some form of default scenario for Greece has sent bond yields in Spanish and Italian 10-year paper (bonds) through the roof," he added.
The Brussels talks, to be enlarged to the full EU 27 on Tuesday, were called to discuss the prickly issue of private-sector involvement in a second bailout of Greece tipped to be almost as big as a 110-billion-euro ($150-billion) rescue in May 2010.
Agreement needs to be reached both on the principle and terms of bringing banks and other private creditors to bear their fair share of a new rescue to avoid the burden falling on European taxpayers alone.
A deal had been expected early this month but was pushed back to post-holiday September. "I'm not sure we can risk waiting until September," said Belgian minister Didier Reynders.
Divisions aired in public over the question by euro-nations in the past days have helped fuel tension on nervous markets.
"Certainly we need to move as fast as possible," said Polish Finance Minister Jan Rostowski, whose country holds the rotating EU presidency. "It's not good to have it not finalised."
Initial French proposals for a voluntary rollover of Greek debt -- buying new Greek bonds when current bonds come due -- appear to have lost favour since a shock warning from Standard & Poor's ratings agency that even this soft option would be viewed as a default of Greece.
But the likes of Germany, the Netherlands and others are ready to stomach a default as long as the private sector pitches in.
"Substantial private sector involvement is for the Netherlands and Germany a precondition," said Dutch Finance Minister Jan Kees de Jager.
"We did not say that it has to be mandatory," he added. "We still pursue a voluntary basis but some ratings agencies will see any substantial participation maybe as not completely voluntary."
But the default scenario remains unacceptable to the ECB as well as to eurozone members. "We always said this would generate instability," said Spain's Salgado.
The ECB says a default would mean it could no longer accept Greek government debt as collateral for loans to Greek banks. That would probably cause the Greek banking sector to collapse.
Current options, diplomats said, include a buyback of Greek debt or a debt swap.