Europe wobbles again

"New fires are breaking out once more," says FxPro.com. Credit-ratings agency Standard & Poor's (S&P) has downgraded nine eurozone countries' debt, stripping France and Austria of their triple-A ratings. S&P has also downgraded the European Financial Stability Facility (EFSF), the eurozone rescue fund, as the money it is raising in the markets is supposed to be backed by guarantees from core countries, including France and Austria. The EFSF's loss of its triple-A rating means it will be even harder to top it up. It is currently too small to rescue Italy and Spain.

All this, however, had already been largely factored in. As usual, says Joachim Fels of Morgan Stanley, official downgrades are "lagging fundamental developments". The real worry now is Greece, where talks on a debt deal were suspended last week, "making disorderly default more likely", says Jeremy Warner on Telegraph.co.uk.

Greek bondholders from the private sector are supposed to agree to write off over half their Greek debt. Bondholders are set to swap their current debt for new 30-year bonds of lower value. The deal is supposed to be voluntary to avoid an official default that would trigger payouts on credit default swaps (insurance on debt) and debt write-downs at fragile eurozone banks.

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Time is short: Greece will run out of money in March if it doesn't agree a haircut. The sticking point now is the interest rate on the new debt. Bondholders thought they'd agreed to just under 5%, but some eurozone governments are pushing for a lower rate, meaning a bigger hit for creditors.

With the highly interconnected European banking system still undercapitalised and the rescue fund too small to stop Italy and Spain being engulfed in a panic, there is no firewall to prevent a "Lehman-style crisis" resulting from an uncontrolled Greek default, says Desmond Lachlan of the American Enterprise Institute, a think tank. In the end, bondholders are likely to "hold their noses, fudge things and hand over the money", says Hugo Dixon on Breakingviews.

But the Greek tragedy could spread even if there is a deal. "The bigger the write-off for Greece and the more aid (in terms of cheap finance), the more other nations will be encouraged to default and the greater the worries of creditors of other nations," says Buttonwood on The Economist website.

A Greek deal could also ultimately lead to spiralling peripheral interest rates, disorderly defaults and a eurozone break-up. After a brief period of calm early this month, says Neil Unmack on Breakingviews, the debt crisis has returned "with a vengeance".