Austerity programme

Greece has requested $52bn from eurozone governments and the IMF to shore up its finances but the reluctance of Germany, the largest country using the euro, to move quickly in providing assistance has sent shudders through markets.

Merkel reiterated on Wednesday that Germany expected Greece to implement an "ambitious" austerity programme if it wanted a helping hand.

Credit ratings agency Standard & Poor's also downgraded Spain's debt on Wednesday, saying its decision to lower its rating by one notch to AA from AA+ was due to its expectation that the country will suffer an "extended" period of subdued economic growth.

The agency said Spain's economic growth in the years to 2016 is likely to average around 0.7 per cent a year against its previous expectation of above one per cent.

Investors fear any rescue package may not reach Greece to enable it to avoid default by May 19, when $12bn in bond payments becomes due.

Strauss-Kahn said on Wednesday that confidence in the eurozone as a whole was on the line following the crisis.

"It is the confidence in the whole [euro]zone that is at stake," he said.

German assurances

Wolfgang Schaeuble, Germany's finance minister, insisted that legislation to free up his country's contribution could get through both houses of parliament within a week, as early as May 7, if Greece wraps up its ongoing talks with the IMF and the European Union quickly enough.

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Guido Westerwelle, Germany's foreign minister, echoed that commitment, insisting that Berlin is ready to act quickly in order to protect the euro.

"We will protect our currency and this is in the deepest interest of every European citizen," he said.

In Europe, Germany's DAX was down 0.5 per cent in afternoon trading on Wednesday, while France's CAC-40 fell 0.8 per cent.

However, Britain's FTSE 100 index of leading shares was up 0.2 per cent amid hopes of an imminent deal

US stocks came back from Tuesday's drubbing on news that the Federal Reserve was unlikely to raise interest rates in the very near future.

All major indices on Wall Street were up at the close on Wednesday, with the Dow Jones industrial average gaining 53.28 points or 0.48 per cent to 11,045.27.

Bond 'meltdown'

In addition to downgrading Greece's debt rating on Tuesday, Standard & Poor's also marked down Portugal's debt status.

The downgrade [Greece's] has "sent the bond markets into meltdown and equity investors toward the exits," said Michael Hewson, an analyst with CMC Markets in London.

Nicholas Skourias, chief investment officer at Pegasus Securities in Athens, said: "There is a very serious risk of contagion, it's something like post-Lehman period. Everybody is panicking and there is a lot of fear in the market".

"I think that today we will have a lot of pressure as well because there is this fear of contagion."

Speaking during a cabinet meeting on Wednesday, George Papandreou, the Greek prime minister, said that every EU member must "prevent the fire that intensified through the international crisis from spreading to the entire European and global economy".

Insisting Greece was determined to bring its economy into order, he said: "We will show that we do not run away. In difficult times we can perform, and we are performing, miracles.

"Our government is determined to correct a course that has been followed for decades in a very short time."