Germans Play Hardball As Euro Crisis Reaches Spain

Fears that the Greek debt crisis could be contagious have grown with the news that the credit agency Standard & Poor has downgraded Spain’s debt to AA from AA+ and Portugal’s to A-. It followed the downgrading of Greek debt to ‘junk’ status, essentially freezing the country out of credit markets.

Now Spain and Portugal – already suffering from the effects of the financial crisis – will have to pay higher interest rates on any bonds they issue. But at least it won’t be anywhere near as high as the 11.1 per cent Greece is having to pay on its 10-year bond following its fall from grace.

The value of the Euro has fallen 13 per cent since November, but an economic meltdown in Spain has the potential to cause much more serious problems for the single currency. The Spanish economy is five times the size of Greece’s and responsible for seven per cent of the eurozone’s GDP. It is also ‘closer to home’ as far as London is concerned, with the Madrid-based Santander banking group now a major player on British high streets. Spanish firm Ferrovial has a majority holding in BAA, the British airports operator and owns Amey UK, which holds a London Underground maintenance contract throught its ownership of Tube Lines.

But more seriously, Credit Suisse analysts say British banks are exposed in Spain to the tune of £75bn – compared to £25bn in Greece and Portugal.

Maria Teresa de la Vega, Spain’s deputy prime minister, sought to calm markets, saying: “We have a very serious plan of… deficit reduction. We have adopted an austerity programme.

“We are adopting all the measures needed to meet our commitments. So I want to send a message of confidence to the population and of calm to the markets.”

IMF boss Dominique Strauss-Kahn has already warned the Greek contagion could spread. “Because Greece is part of the eurozone, it is the confidence in the zone which is at stake. Every day lost is a day where the situation is getting worse and which can have consequences far away,” he said yesterday in Germany, where he was trying to push through a rescue package for Greece.

Greece’s next loan repayment is in mid-May, and a deal must be struck by then if the country is to avoid defaulting on its debts. At the moment, a loan of €45bn is on the table (£39bn), but German MPs yesterday said Greece needs €120bn over three years – two-thirds of which would be provided by eurozone countries.

The German public knows they will pay the largest slice of this – which explains their government’s reluctance to agree anything without significant cuts in the Greek government’s budget. One particular bugbear is the pensions Greeks enjoy, which have increased in past years while German pensions have been frozen. Many are now saying it would be better if Greece left the euro entirely.

With elections due in two weeks time in Germany’s most populous state, the Chancellor Angela Merkel faces losing her governing coalition’s majority if she bails out Greece – leaving her with the dilemma of whether to rescue the euro or her premiership.



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