Pressure rises on Germany in eurozone debt crisis

(FRANKFURT) - Pressure on Germany to give ground in the Greek debt crisis rose Thursday as the eurozone drama, coupled with a warning of a US debt downgrade, stoke tensions on global markets.

Italy responded to the rapidly rising dangers of debt contagion by racing to approve radical budget cuts to prevent its economy, the third-biggest in the eurozone, from being dragged down after Greece, Ireland and Portugal.

Ratings agency Fitch affirmed Italy's AA- credit rating, but downgraded Greece by three points to CCC from its previous rating of B+.

That was the second rating blow to eurozone countries in 24 hours following a junk status downgrade for Ireland.

Fitch said the urgency of organising a second rescue for Greece would have required a plan from the European Union and International Monetary Fund at the beginning of July, and owing to uncertainty over any contribution from private investors.

Berenberg Bank chief eurozone economist Holger Schmieding warned that "markets are anxiously waiting for policy makers to resolve their differences.

"The dispute between finance ministers and central bankers is dangerous," he stressed.

"Hyper-nervous investors need to be re-assured that there will be a solution soon and that the most important policy makers, namely the major paymasters and the European Central Bank -- put differently: Berlin and Frankfurt -- back the solution," Schmieding said.

Germany wants private holders of Greek bonds to shoulder part of the costs of a second rescue for Athens worth about 110 billion euros ($156 billion). The IMF has voiced support for this but the ECB is strongly opposed.

There was a sign, however, that Germany might be preparing to back down however, in the form of a report in business daily Handelsblatt.

Handelsblatt quoted a finance ministry representative as saying: "As things stand, such an undertaking is highly unlikely."

The ministry has suggested a possible way forward now could be to use funds from the European Financial Stability Facility (EFSF) to buy Greek debt, taking advantage of sharp discounts on bond markets to then cancel the debt.

ECB leaders, who fear private sector involvement in a new bailout could trigger a default rating, urged the eurozone to get moving on a solution.

Meanwhile, Moody's rating agency placed the United States's AAA debt on a downgrade watch because of rising prospects the US debt limit would not be raised in time to avoid default.

China also expressed concern after its Dagong credit ratings agency echoed Moody's by putting US sovereign debt on downgrade watch, citing weak US economic growth and the likelihood that fiscal deficits would remain high.

The string of warnings from rating agencies on eurozone and US debt came after days of attacks on the agencies by leading EU figures for the content and timing of their assessments.

But many voices, particularly in the financial markets, have expressed dismay at the confusion and contradictions in the handling of the eurozone crisis and the contagion it is spreading.

German central bank president Jens Weidmann warned in the daily Die Zeit that "the concert of voices that has expressed opinions in recent weeks, and not only about the private sector involvement -- has not helped instill confidence in the politicians' ability to resolve their problems."

Germany appeared to get support however from the IMF, which said that "comprehensive private sector involvement is appropriate, given the scale of financing needs and the desirability of burden sharing."

Barclays Capital economist Thorsten Polleit told AFP: "Investors have become increasingly aware that there is no easy and quick way out in economic and political terms."

Italian central bank head Mario Draghi, who will take over as ECB president in November, stressed that a definitive plan is needed quickly.

That echoed comments by Greek Prime Minister George Papandreou who said eurozone leaders had lost time and were "struggling to take decisions", but that progress had been made in last few days.

European Union president Herman Van Rompuy had floated the idea of a crisis summit but German Chancellor Angela Merkel, who is in Nigeria, said: "The pre-condition for such a summit meeting would be that we would be in a position to take a decision and finalise the programme on Greece."

The eurozone is still considering holding a crisis summit but it will take place "when the time is right," the European Commission said on Thursday.

Finally, the eurozone braced for the release on Friday of bank stress tests that are supposed to demonstrate to markets that most commercial banks are strong enough to weather fresh financial shocks.

Any unpleasant surprises from the tests will likely only turn the screw tighter on the struggling eurozone countries.