Fitch Ratings cut Spain’s credit ratings to AA+ from AAA on Friday, saying its economic recovery would be more muted than the government forecast, pushing world equities and the euro lower.

The downgrade follows a cut by another agency Standard and Poor’s last month and heaps more pressure on the government, battling to reassure markets its fiscal, political and social woes will not end up in a Greek-style debt crisis.

Fitch said Spain’s deleveraging of record-high levels of household and corporate debt and growing levels of government debt would drag on economic growth.

“The downgrade reflects Fitch’s assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term,” Fitch’s analyst Brian Coulton said in a statement.

Read More: – Reuters

Governments struggling with huge debt loads and now embarking on fiscal austerity measures, such as Greece, may be unable to grow their way out of trouble, the manager of the world’s biggest bond fund wrote on Wednesday.

Bill Gross, the co-chief investment officer of Pimco and manager of the firm’s Total Return fund, said in his monthly note to investors that higher market interest rate levels will impede full repayment.

A surge in the London Interbank Offer Rate (Libor) is dimming hopes for a sustained global economic recovery because an increase in banks’ borrowing costs can spark higher interest rates for borrowers on everything from mortgages to corporate loans.

“At the now restrictive yields of Libor plus 300-350 basis points being imposed by the EU and the IMF alike, there is no reasonable scenario which would allow Greece to ‘grow’ its way out” of debt, Gross wrote. Pacific Investment Management Co. oversees more than $1 trillion in assets.

Libor is indicative of the different prices at which a panel of banks in London estimate they could obtain funds in the interbank market.

Read More: – Reuters

In Greece, trombone players and pastry chefs get to retire as early as 50 on grounds their work causes them late-career breathing problems. Hairdressers enjoy the same perk thanks to the dyes and other chemicals they rub into people’s hair.

Then there are masseurs at steam baths: They get an early out because prolonged exposure to all that heat and steam is deemed unhealthy.

Until the Greek debt crisis, northern Europeans looked at Greek early retirement with an amused roll of the eyes. But more such loopholes are angering them: They bristle at being asked to pay for their laggard southern neighbors’ early retirement.

When Germany’s top-selling newspaper Bild asked readers in that fiscally prudent nation how they felt about coughing up hard-earned money for this kind of luxury, the daily’s website lit up with comment.

In a bloc with a shared currency but no power to enforce budgetary restraint and keep members from spending themselves into messes like Greece’s, the retirement quirk illustrates another fault line that crept to the surface with the debt crisis that began in Athens and is threatening to spread across the eurozone.

Read More: – the Associated Press

European leaders still don’t understand what caused the Aegean Contagion that swept through the eurozone in late April and early May. Swedish Finance Minister Anders Borg blamed “wolf-pack behavior” by speculators. Others have railed against clueless rating agencies, feckless debtors, and unreasonable creditors. Then there are those who ask if there’s an inherent flaw in the bond markets that made them cascade, turning vague worries into scary, self-fulfilling prophecies.

You can’t defeat an enemy you don’t understand, and unless Europe gets a better grasp on what went wrong, it will be vulnerable to more turmoil, even with the nearly $1 trillion backstop lending authority that calmed markets. “I still think it’s a very fragile situation,” says Gary Gorton, a Yale University economist.

The reality isn’t all that complicated. Europe was vulnerable to contagion, and remains so, because its governance and its financial system are weak. It was lax fiscal oversight that allowed nations such as Greece to violate European Union rules on the size of their budget deficits in the first place. Overleveraged investors made matters worse: When the value of their Greek debt fell, they were forced to reduce the size and risk of their portfolio by selling other assets—the debt of Portugal and Spain, for example.

Read More: – By Peter Coy, Businessweek

Former U.S. Treasury Secretary John Snow suggested the euro may not survive unless member nations agree to merge policies from budgets to labor markets.

“I hope it works, I believe in it,” Snow said in an interview late yesterday at the University of Oxford’s Said Business School in Oxford, England. “But the economist in me says that it’s going to be tough without accommodations.”

The common currency has weakened against the dollar this year amid investor concern on how indebted nations will cut budget deficits and access aid if needed. European Union officials agreed to a $1 trillion bailout this week to keep Greece from defaulting and stem a rout in government debt that jeopardized the ability of Spain and Portugal to borrow.

“For the euro to be able to survive long term, fiscal consolidation of some kind — tax policy consolidation, fiscal policy consolidation — is probably necessary,” he said. “But that’s not enough, you really need one labor market, one capital market. Europe is going to face hard choices in the future to make this thing work.”

Read More: – By Jennifer Ryan, Bloomberg

Spain’s leading labor union has called a civil servants strike next month to protest government plans to cut salaries as part of a plan to reduce the deficit.

The General Workers Union said Thursday the stoppage would be staged June 2.

Prime Minister Jose Luis Rodriguez Zapatero on Wednesday announced a 5 percent wage cut for civil servants as part of a deficit-reduction plan to ease worries the country will slide into a debt crisis like that of Greece.

Read More: – Associated Press

Germany forecast a massive fiscal hole on Thursday, highlighting the parlous state of its public finances and giving Chancellor Angela Merkel precious little room to deliver on promised tax cuts.

Figures from the finance ministry showed that tax receipts over the period 2011 to 2013 would be around 39 billion euros (50 billion dollars) less than predicted last year.

Germany, quick to lecture Greece over its debt crisis, has considerable fiscal problems of its own that were exacerbated by its biggest recession since World War II last year when output shrank five percent.

Europe’s biggest economy, now pressing for tougher European Union rules on deficits in light of the Greek turmoil, expects to borrow around 80 billion euros this year and to spend far more than it earns.

The country, which recently lost to China its crown as the world’s biggest exporter, is also faced with an ageing population, which squeezes government income while at the same time expanding its spending needs.

Read More: by Simon Sturdee, AFP

European Central Bank council member Axel Weber said Greece’s fiscal crisis is threatening “grave contagion effects” in the euro area as stocks fell around the world and riots in Athens left three people dead.

“There is a threat of grave contagion effects for other member states in the monetary union and increasing negative feedback loop effects on capital markets,” Weber said in a statement today as German lawmakers in Berlin debate the proposed rescue of Greece. “All in all, Germany’s contribution to the aid package for Greece is justifiable.”

The euro is tumbling as the Greek fiscal crisis spreads to other indebted nations such as Spain and Portugal. Moody’s Investors Service today placed its Aa2 rating on Portugal’s debt on review for a possible downgrade. In Germany, Chancellor Angela Merkel appealed to parliament to approve the country’s 22.4 billion-euro portion of the joint European Union- International Monetary Fund bailout amid public opposition.

“Weber is worried,” said Juergen Michels, chief European economist at Citigroup Inc. in London. “He knows that if Germany doesn’t ratify the Greek aid plan rapidly we’re facing more turbulence in the weeks ahead.”

Read More: -By Gabi Thesing, Bloomberg

A widening financial crisis in Europe is threatening to put a damper on the economic recovery here and abroad just as the American economy is gathering steam.

A credit contagion that began in heavily indebted Greece spread Wednesday to Spain, whose economy is much larger than Greece’s, as Standard & Poor’s cut the Madrid government’s credit rating, just one day after slashing Athens’ bonds to “junk” status and downgrading Portugal’s debt as well.

European officials pledged Wednesday to act swiftly on a hefty package of loans for Greece, but skepticism remained that Germany, the continent’s strongest economic power, would ultimately agree to the plan.

Even under the rosiest scenario in which a rescue package comes through and the problem is contained, analysts say, European economic growth will slow as more countries feel pressure to raise taxes and take other tough measures to get their fiscal affairs in order.

Read More: – By Don Lee, Los Angeles Times

New York University economist Nouriel Roubini says the euro zone’s days may be numbered, and he’s not talking about some day far off in the future.

“In a few days, there might not be a euro zone for us to discuss,” he said at a Los Angeles conference sponsored by the Milken Institute, Reuters reports.

European policy makers may have to fork over 600 billion euros ($794 billion) in aid or buy government bonds to erase the debt crisis, economists tell Bloomberg.

Roubini says Greece can’t come up with the 10 percent spending reduction necessary to prevent its debt from exploding out of control.

And even if it could, its economy would get ruined in the process, he maintains.

Roubini compares Greece to Argentina in 2001, shortly before it defaulted on its debt.

Read More: – By Dan Weil, Moneynews