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Spanish downgrade adds to euro zone tensions


Pressure for progress on debt crisis intensifies ahead of summit of European leaders

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The double-notch downgrade of Spain’s credit rating has added to the tension in the euro zone where leaders are set to meet for discussions on how to solve a worsening sovereign debt crisis.

Moody’s Investor Services cut the Spanish rating by two notches on Tuesday just hours after warning France that the Triple-A status of its debt could in jeopardy. Meanwhile, tough austerity measures are being instigated in Greece, where the threat of a debt default looms large.

Markets are counting down to a summit of EU leaders on Sunday which Paris has said will deliver a decisive outcome while Berlin has been more cautious.

German chancellor Angela Merkel warned that leaders would not solve the debt crisis at a single meeting.

“These sovereign debts have been built up over decades and therefore one cannot resolve them with one summit but it will take difficult, long-term work. Nonetheless, I do think we will also be able to take relevant, important decisions,” she said.

The hope is that Sunday’s summit will agree new steps to reduce Greece’s debt, strengthen the capital of banks with exposure to troubled euro zone sovereigns and leverage the euro zone’s rescue fund to prevent contagion to bigger economies.

Greece remains mired in recession and its overall debt is forecast to climb to 357 billion euros ($489 billion) this year, or 162 percent of annual economic output -- which few economists believe can be paid back.

Moody’s cut Spain’s bond rating to A1, from Aa2, the third of the major agencies to act in recent weeks and taking it a notch below the ratings of Standard & Poor’s and Fitch.

The agency’s reasoning may focus minds ahead of Sunday’s summit, highlighting the lack of resolution to the currency bloc’s crisis rather than particular Spanish policy shortcomings.

“Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area's political cohesion and growth prospects to be fully restored,” the agency said.

In a statement, Spain’s Treasury said the downgrade reflected a short-term reaction to negative euro zone debt markets, rather than a change in medium and long term economic fundamentals, adding that the government remained committed to fiscal consolidation and reform.

While Europe’s leaders rush to stop a larger writedown of Greek debt infecting others in the euro zone, for ordinary Greeks, the cuts demanded of their country in return for help means facing up to years of pain.

Greek unions began a 48-hour general strike, the biggest protest in years, as parliament prepares to vote on sweeping new austerity measures designed to stave off default.

The strike shut government departments, businesses, public services and even providers of everyday staples like shops and bakeries and will culminate in mass demonstrations outside parliament.

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Spanish downgrade adds to euro zone tensions
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