World leaders again demanded tough measures by Greece to control its debt mountain amid new warnings Thursday that the crisis could spread to other countries.
With the cost of an international rescue now put at more than 120 billion euros (160 billion dollars), US President Barack Obama and German Chancellor Angela Merkel called for "resolute action" by Athens to control spending.
Share markets and the euro currency have been jolted by the demotion of Greek debt to "junk" status while Portugal\'s credit rating has been slashed and Spain\'s downgraded.
Markets and the euro currency stabilised on Thursday however after several days of losses amid rising fears over Greece\'s battle to secure new loans by May 19 deadline to avoid a default.
After balking at pressure to lead Europe\'s rescue effort, Merkel has signalled that Germany will now get beind the operation.
Merkel and Obama "discussed the importance of resolute action by Greece and timely support from the IMF and Europe to address Greece\'s economic difficulties," the White House said after telephone talks between the two leaders late Wednesday.
Germany has indicated it will lend money if Greece promises to make further heavy cuts to the public deficit, which the EU has estimated at 13.6 percent of gross domestic product.
Merkel apparently eased her stance after talks in Berlin late Wednesday with International Monetary Fund chief Dominique Strauss-Kahn and European Central Bank president Jean-Claude Trichet.
The IMF head warned confidence in the entire 16-nation euro area was now "at stake" and Greek Prime Minister George Papandreou said the EU "must prevent a fire" from engulfing the European and world economy.
"It is perfectly clear that the negotiations with the Greek government, the European Commission and the IMF need to be accelerated," Merkel said after meeting with Strauss-Kahn.
"We hope they can be wrapped up in the coming days and on the basis of this, Germany will make its decisions," she told reporters.
Greece must be rescued to stop the debt crisis spreading to other parts of the euro area, Germany\'s central bank chief said Thursday.
"Let me be clear -- aid for Greece as a last resort is in my view the best way to avoid the crisis spreading to other member states and the euro area with extremely negative consequences," Axel Weber told the Bild daily.
Weber said the effects of letting Greece default were "incalculable" and stressed that expelling Athens from the euro area was "legally not possible."
"Hard austerity measures in the country will of course not be easy but they will be more bearable than leaving the euro area," he said.
Signs of a hitch in the talks emerged however when Greek Labour Minister Andreas Loverdos said his government was resisting EU and IMF demands to cut salary bonuses in the private sector.
"We have been asked for a cut which we do not accept," Loverdos told reporters.
Reports said wage and job cuts for public workers would be ordered to get through what the Kathimerini daily called "three hard years."
Kathimerini said public workers would lose an annual bonus worth two months\' wages, there would be more job cuts along with a hiring freeze in the public sector.
The centre left To Vima newspaper said private sector wages would be frozen and value added tax increased from 21 percent to 23 percent.
Other countries have been quick to deny that they face the same problems as Greece, despite the downgrades for Portugal and Spain and attention put on Italy\'s economy.
French Budget Minister Francois Baroin said Thursday: "There\'s no risk of seeing our rating lowered." He said that French bonds remain a "signature refuge" for lenders seeking a safe government client.
The euro plunged to its lowest level against the dollar in more than a year and was trading at 1.3206 in early Asian trade Thursday.
"The downgrade of Spanish government debt by S&P is another alarming sign that the effects of the Greek crisis are spreading," said European economist Ben May at research firm Capital Economics in London.
Standard & Poor\'s lowered Spain\'s long-term sovereign credit rating to "AA" from "AA+" and said the outlook was negative, meaning there could be a further downgrade.
Spain, with an economy five times the size of Greece\'s, has sought to reasure investors.
"I want to send a message of confidence to the population and of calm to the markets," Deputy Prime Minister Maria Teresa de la Vega said, insisting that Spain was cutting its debts.
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