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.
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Reuters - Europe issued a full-throated assault on credit ratings agencies on Wednesday, saying there were signs of bias against the European Union after Moody's downgraded Portugal's debt to "junk" status.
European Commission President Jose Manuel Barroso said Moody's decision to lower Portugal by two notches and maintain a negative outlook was fuelling speculation in financial markets. Europe was looking at getting away from its reliance on the mainly U.S.-based ratings companies, he added.
"Yesterday's decisions by one rating agency do not provide more clarity. They rather add another speculative element to the situation," Barroso told reporters, adding that the agencies were not immune to "mistakes and exaggerations."
"It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe," he said, stating publicly a view that many senior EU officials have pushed privately for some time.
It is not the first time during the sovereign debt crisis that the EU has taken the major agencies -- Moody's, Standard & Poor's and Fitch -- to task, but the message this time was delivered with a much greater sense of frustration.
Barroso's comments followed German Chancellor Angela Merkel's brushing aside on Tuesday of a warning from S&P, the largest agency, that it would view the current French plan for a partial rollover of maturing Greek debt as a default.
Such a move would narrow the options available to EU leaders to tackle the crisis and could greatly exacerbate the situation.
Merkel suggested the EU had depended for too long on the opinion of outside, private-sector agencies and said Europe had its own institutions that it needed to put its trust in.
"It is important that the troika (EU, IMF and European Central Bank) do not allow their ability to make judgments to be taken away," she said. "I trust above all the judgment of these three institutions."
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