ATHENS, Oct 19, 2011 (AFP) - Violent protests rocked Greece, Germany lowered its growth forecast and Spain was hit by a credit downgrade Wednesday in an increasingly grim build-up to a crunch summit on Europe's debt crisis.
Diplomatic sources said leaders would consider boosting the capacity of their eurozone rescue fund to up to two trillion euros when they meet from Friday, while emerging powers added their voice to calls for decisive action.
|AFP - An Italian policeman (C) collects money to buy petrol during a demonstration on October 18, 2011 in Rome.|
French President Nicolas Sarkozy held talks with Chancellor Angela Merkel in Frankfurt on the crisis as a general strike and protests in Greece served as a shot across the bows of leaders demanding more belt-tightening.
The sense of despair was best illustrated in Athens where police clashed with protesters outside parliament on the eve of a vote on a new round of spending cuts.
"I can either pay my taxes or feed my children, I cannot do both," Sophia Robola, an employee at a store shutter company, said as she joined the protests.
The authorities said more than 70,000 people converged on central Syntagma Square while unions put the figure at 200,000, making it the biggest such protest to date.
Tear gas blanketed central Athens as police fought to keep control, while thousands of peaceful protesters braved the clashes and remained on the square in front of the Greek parliament.
The protests came on the first day of a 48-hour general strike. Unions in Portugal, another country which has had to slash spending to secure loans, also announced a shutdown for November 24.
Greece secured an agreement last year for a 110-billion-euro ($149-billion) bailout package from the Europe Union and the International Monetary Fund but it has had to convince the lenders that it is implementing stringent spending cuts to qualify for each loan installment.
Measures taken so far include a rise in the retirement age and major cuts to civil servants' salaries. Plans for temporary lay-offs of many public sector workers should also be approved in a vote on Thursday on an austerity bill.
Greek parliamentarians held a preliminary vote on the bill at a session late Wednesday and adopted it in first reading.
EU leaders will discuss new ways to help out Athens at their summit and rubber-stamp the release of the next eight billion euros in loans.
They will also look to strengthen the European Financial Stability Facility (EFSF), which now has 440 billion euros but would need much more if it had to throw a lifeline to other strugglers such as Italy or Spain.
According to one diplomat, the leaders would discuss boosting the fund's capacity to between "one and two trillion euros".
The source said EU president Herman Van Rompuy had been in discussions with outgoing European Central bank chief Jean-Claude Trichet, the German and French governments and European Commission chief Jose Manuel Barroso.
The weekend summit must deliver "a vigorous response to give guarantees to all countries", Barroso said, highlighting the need to help Spain.
"We are at a crucial moment which can be decisive for the EU," he added.
In Frankfurt, Sarkozy held two-hour talks Merkel on finding a solution to the crisis but neither made any comments.
"This crisis is going to lead us in the days ahead to take important, very important decisions... Allowing the destruction of the euro would be to take a risk of destroying Europe," Sarkozy said earlier.
European Commissioner for Internal Market and Services Michel Barnier was meanwhile due to unveil a raft of measures to ensure market transparency and protect investors on Thursday.
"Our proposals aim at restoring order in financial markets," he told Belgian newspaper La Tribune in an interview.
The alarm was also sounded by India whose Finance Minister Pranab Mukherjee told journalists that "the eurozone is in a deep structural debt crisis" and said there was a belief among the Group of 20 major economies that it should put its own house in order before seeking help from outside.
Reports that the EFSF would be increased helped Europe's stock markets and the euro rally.
London's FTSE 100 index of top shares rose 0.83 percent while Frankfurt's DAX 30 also jumped 0.88 percent.
However the prospect of lower than expected growth in Germany and the downgrade of Spain's credit rating tempered the mood.
Government sources told AFP that Germany would slash its forecast to 1.0 percent for 2012, compared to the 1.8 percent projected in April, when it releases updated projections on Thursday.
In Britain, which is not part of the eurozone, minutes of the latest meeting of the Bank of England's policymakers showed a consensus that the economy would fail to pick up in the fourth quarter.
The dire situation in Spain was illustrated by the downgrade late Tuesday from Moody's who slashed its country rating by two notches to A1 from Aa2, with a negative outlook.
Moody's cut the ratings of nine regions, two Basque provinces and five other government-related entities by one or two steps each on Wednesday, and labeled them with a negative outlook, suggesting possible future downgrade.
One region, Castile-La Mancha, was hit with a five-notch ratings cut to Baa2.
"Large financing needs alongside constrained access to long-term funding sources have forced regions to deplete their cash reserves, extensively use short-term credit lines, and expand their commercial debt obligations," Moody's said in a statement.
It also cited persistent budget shortfalls "due to the regions' difficulty in reining in their cost bases significantly".
Castile-La Mancha's sharper downgrade came based on recent disclosures that put the large central-Spain region's finances "incompatible with an investment-grade rating".
Earlier Wednesday Spain's Treasury challenged the sovereign downgrade, saying in a letter to investors the downgrade "may be motivated more by a short-term reaction to negative news about the eurozone debt markets" than by long-term fundamentals.
"The nation's significant deleveraging has significantly reduced its external financing needs," the Treasury said. "The Spanish government remains committed to fiscal consolidation and structural reform."