The cut in the rating of Portugal decided by Fitch dragged the euro to a minimum of 10 months and served as a reminder of the risk of contagion from problems in Athens to the euro area members with high levels of debt.
Diplomats said France and Germany, founders of the euro, are negotiating the conditions for an intensive support mechanism as a last resort in Greece, in which Berlin calls for the International Monetary Fund has a central role.
The European commissioner for economic and monetary affairs commissioner Olli Rehn said that Greece is on track to achieve the goal of reducing its fiscal deficit by 4 percentage points this year, following the measures adopted by the Parliament of the country this month.
However, he warned in a press conference that both Greece and the euro area are not immune from the crisis yet.
"Therefore, the (European) Commission encourages members of the eurozone to take a political decision on a mechanism to ensure financial stability in the euro area as a whole," he said.
A German government official said it expected to take a decision on an aid package to Greece at the meeting on Thursday will hold the European leaders in Brussels, but noted that the idea of a bailout with IMF involvement was growing among EU governments.
German Chancellor Angela Merkel, who faces stiff opposition at home to any rescue attempt to Greece, he insists that to support an aid package, the EU rules should be amended to establish tougher penalties for members who violate laws on the fiscal deficit, German officials said.
European diplomats have said that the goal is to conclude a political agreement before the formal meeting of the 27 EU leaders, what could possibly happen at a separate meeting that brings together the 16 euro zone countries.
"We are moving toward a solution, but it's difficult," said one diplomat. "We can all see the risks if there is no agreement," he added.
A Greek Government spokesman said that negotiations for a European aid plan were in place and that all options were on the table.
Athens has not formally asked to help their colleagues in the EU, but believes that establishing a support mechanism could reduce the market pressure, lowering their borrowing costs to refinance their obligations on their own.
The downgrade of the credit agency Fitch Ratings to sovereign debt rating of Portugal in a notch to "AA-", due to loose fiscal developments in 2009, there was a dramatic change, but it did have a psychological impact due to climate of uncertainty.
"The downgrade has more impact on the sovereign debt crises, rather than in Portugal so far," said Peter Chatwell, bond analyst at Credit Agricole in London.
France open to the IMF
Following the report by Fitch, the euro fell more than 1.0 percent against the dollar at $ 1.3335, its lowest level since early May 2009.
Portugal shares also fell and the risk premium on the debt of Portugal and Greece against German bonds increased as the market digested the announcement by Fitch.
Greece needs to get about 16,000 billion enter on 20 April and 23 May to refinance its debt. Under current rates, the country would have to offer a yield of 6.5 percent for this money, more than double the borrowing costs for Germany and France.
But the German official reiterated that any rescue mechanism would apply only if Athens is unable to obtain financing in the market.
The EU governments expect any agreement on a mechanism of support is enough to convince markets that reduce spreads on debt of Greece and other countries on the periphery of the eurozone.
Moreover, the socialist leaders of Europe, including Greek Prime Minister George Papandreou, on Thursday presented a plan to create a lender with the support of the euro area, and serving as aid to Greece, said a source familiar with the matter.
Under the proposal drawn up by the Socialist Party would create a fund to raise money in the market by issuing bonds at low rates and then lending it to Greece.
However, the plan has little chance of being adopted, since few EU leaders belong to the left, and Germany, the bloc's leader, staunchly opposes the idea of a collective debt issuance in Europe.
The idea of helping to Athens through a plan involving the IMF divides those who support further European integration, with the euro area as a center, of those who oppose a union closer economic and taxation.
So far, France has rejected any international lender participation in the euro zone, arguing that this would be a political humiliation and would signal to markets that the area is incapable of solving their own problems.
But diplomats said that Paris seemed resigned to grant a role to the IMF, headed by former Finance Minister Gallo, Dominique Strauss-Kahn, as the price we must pay to secure the support of Germany to a rescue mechanism.
(Additional reporting by Harry Papachristou in Athens, Paul Carrel in Berlin and Jan Strupczewski in Brussels, written by Paul Taylor)
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