European officials today tried to prevent the debt crisis from spilling over into bigger economies such as Italy and Spain, as disagreements delayed 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 eurozone, most dramatically in Italy, as rating agencies warned that even a voluntary involvement will likely be seen as a partial default of Greece on its massive debts.
Although the proposals currently doing the rounds may be less severe than a Greek payment halt, for example, rating agency Moody's said that the "prospect of any form of private sector participation in debt relief is obviously negative for holders of distressed sovereign debt."
That 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.
Spanish Prime Minister Jose Luis Rodriguez Zapatero called for a "swift and precise clarification" of how a second bailout for Greece might work, to help ease the tension. He said the meeting of finance ministers in Brussels should "contribute to that goal."
That demand was echoed by Greece's finance minister. "We need today a very strong message of stability, not only in Greece but in (the) eurozone," Evangelos Venizelos said as he arrived in Brussels.
Most of his colleagues, however, tried to play down concerns over Italy, which has moved to the centre of debate over the past days, and said that there was time until September to reach a final deal on Greece.
The markets were telling a different story. The yield, or interest rate, on Italian and Spanish government bonds shot up, in contrast to other big economies, while the euro dropped.
At the centre of the discussions will be whether a substantial contribution from banks to a second Greek bailout is worth letting the country temporarily slip into default.