Officials weigh expanded bailout package for Greece

By Anthony Faiola and Peter Whoriskey
Washington Post Staff Writer
Thursday, April 29, 2010

LONDON -- Economic leaders in Europe considered a rescue plan for Greece on Wednesday that would more than double the proposed bailout package, to $158 billion, as pressure for action mounted amid signs that debt crisis was spreading to other heavily leveraged European nations.

The credit-rating agency Standard & Poor's lowered its rating of Spain on Wednesday, just a day after doing the same for Portugal and Greece.

With investors increasingly leery of financing those countries' debts, European and International Monetary Fund officials arranging the Greece bailout struggled to reach a consensus about what should be done.

IMF Managing Director Dominique Strauss-Kahn met with German lawmakers in Berlin on Wednesday to discuss the rescue, hoping to persuade them to support a three-year plan that would extend aid to Greece if the country promises fiscal austerity measures.

"Every day that is lost is a day where the situation is getting worse," Strauss-Kahn said. "Not only in Greece, but in the E.U. and also more far away."

European and IMF officials have said that a Greek deal could be done "within days." Strauss-Kahn declined to cite details of the aid package but said that time was running out, as investors have sold off not only Greek bonds in recent days but also those of Spain, Portugal, Italy and Ireland.

Although Greece accounts for less than 3 percent of the European Union's economy, some economists said that the country's turmoil could infect other heavily indebted nations.

"I like to remind people that Thailand was a fairly small country but the Asian crisis had its origin there," said Carmen Reinhart, director of the Center for International Economics at the University of Maryland and a specialist in financial crises.

Others compared the Greece crisis to the collapse of Lehman Brothers and the resulting fears of a domino effect on other financial firms.

"We are becoming increasingly concerned that the crisis in Greece could pose as big a risk to the global economy and financial markets as the collapse of Lehman Brothers did in September 2008," the advisory firm Capital Economics wrote in a note to clients. "The fact that a Greek default is even considered possible is a fundamental shock to confidence in the world order."

The turmoil has driven up the interest rates at which the Greek government can borrow money, creating the risk of a financial death spiral: Higher rates make it harder for the nation to meet its obligations, which in turn causes investors to demand higher rates.

The effective interest rate on a two-year Greek bond neared 16 percent Tuesday, more than 15 percentage points above that for a two-year German bond. The rate on a two-year Portuguese bond was 4.8 percent, up from 1.3 percent six months ago.

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