Euro Zone Debt Crisis Intensifies Ahead of Summit


Moody's cut Spain's debt rating on Thursday, pushing the euro lower and deepening the sense of crisis in the 17-nation currency bloc on the eve of a crucial summit.

German Chancellor Angela Merkel signaled to lawmakers in a closed-door meeting that she was prepared to agree an increase in Europe's rescue fund later this month, participants said, but only under conditions that other states may find difficult to accept.

Investors pushed the single currency to a one-week low under $1.38, the risk premium on Spanish bonds widened and the cost of insuring Spanish, Greek and Portuguese debt against default rose as a fresh wave of euro zone jitters hit financial markets.

Leaders from the currency area are expected to back a watered-down version of a German-French plan to boost economic competitiveness at Friday's Brussels summit but are unlikely to overcome sharp differences over whether the rescue fund should be given new powers that would help it ease the burden on highly-indebted euro states.

A German official lowered any expectation of a breakthrough, saying no decisions would be taken on strengthening the European Financial Stability Facility (EFSF) on Friday.

The question of raising the fund's lending capacity would be decided in a package at the end of March, he said, and Berlin opposed giving the EFSF or its successor any direct or indirect role in buying troubled states' bonds on the secondary market.

Merkel told members of the Bundestag's European affairs committee, according to the participants, that boosting the fund would depend on countries that do not have a triple-A rating injecting capital, a step some of them have already signaled they will resist.

EU diplomats said France and several other countries want at least an outline agreement on Friday on the remit of a planned permanent financial rescue mechanism for the euro zone.

"The quicker we get a deal the quicker we calm the markets," one senior diplomat said.

Traders said the euro could fall further due to market concerns that Friday's 17-nation meeting and a summit of the full 27-nation European Union on March 24-25 may fail to agree on decisive action to tackle the debt crisis.

"If officials make no progress and Germans remain unwavering in their demands, the likelihood of a capitulation (in the euro) will be significantly higher," said Jessica Hoversen, currency strategist at MF Global in Chicago.


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