Europe may be months, conceivably weeks, away from an expanded debt crisis that cuts more countries off from access to the markets and forces fresh emergency action by rich governments or the European Central Bank.
The many potential triggers for an expanded crisis include a failed bond auction, any signs that Athens or donor nations were backing away from a 110 billion euro ($141 billion) bailout of Greece, and a freezing up of Europe's interbank money market.
For now, Portugal, Ireland and Spain, widely seen as the next possible "dominoes" after Greece, remain in significantly better shape. The interbank market is far from grinding to a halt as it did after Lehman Brothers collapsed in late 2008.
But the spread of investor jitters in the past 24 hours, affecting markets as distant as yen swaps in Tokyo, suggests market conditions could deteriorate as rapidly as they did during the global financial crisis of 2007-2009.
"In my view there is a 10-20 percent chance that at least one more country will need rescuing as it finds itself shut out of the markets," said Marco Annunziata, chief economist at Italy's UniCredit bank.
"If it happens, it is most likely to happen in the coming six months."
Lena Komileva, head of G-7 market economics at money broker Tullett Prebon, said the crisis over Greece's solvency had morphed into a capital markets crisis, and the markets had begun to feed on their own momentum.
"Another credit event similar to Greece can happen within weeks," she said.
German Chancellor Angela Merkel and top economic policymakers in the euro zone appeared to recognize this in their warnings about the risk of an expanded crisis on Wednesday.
"It's absolutely essential to contain the brushfire in Greece so that it will not become a forest fire and a threat to financial stability for the European Union and its economy as a whole," said European Monetary Affairs Commissioner Olli Rehn.
Greece became unable to finance its debt at affordable rates when its 10-year government bond yield soared near 10 percent in April. The euro zone's other weak countries have not reached that stage; Portugal's yield was below 6 percent on Wednesday.
Portugal sold 500 million euros in six-month Treasury bills on Wednesday at a yield of 2.955 percent, which was about four times the rate at the last such sale on March 3 but was well below maximum levels in the secondary market. This was seen as a moderately positive sign by analysts.
Spain is expected to succeed in selling 2-3 billion euros of government bonds on Thursday, although at a much higher yield than in its last auction, analysts said.
Nevertheless, every debt sale by weak euro zone states in coming months is likely to be viewed as a potential flashpoint for an expanded crisis. Portugal plans to offer more T-bills on May 19 and Spain plans another bond sale on May 20.
Annunziata estimated Spain's bond spreads were still low enough for it to borrow at current rates for at least a year or more without doing serious damage to its finances. Portugal can keep borrowing at current rates for at least a year, he said.
But he added, "The problem, as for exchange rates, is also the speed of the movement. If spreads keep widening then markets could more quickly lose confidence and the problem would be the quantity of available financing, not the cost."
Meanwhile, the Greek bailout package announced this week imposes such harsh austerity measures on Greece that the markets will continue doubting the country's political will and economic ability to stick to the package.
Any sign that the government of Prime Minister George Papandreou was backing off from key fiscal reforms in the face of public opposition could raise the prospect of a Greek debt restructuring or default, triggering an expanded crisis.
The European Commission and the International Monetary Fund will monitor Greece's progress every quarter and link aid disbursements to those reviews. The reviews could become triggers for an expanded crisis if Germany, where public opinion strongly opposes helping Greece, decides Athens is not meeting aid conditions and balks at a disbursement.
The markets could also panic if commercial banks around Europe, which have cut off funding lines to Greek banks, decide to do the same to banks in Portugal, Ireland and Spain.
So far the stresses in the money markets do not approach those seen at the peak of the global crisis. The two-year euro zone swap spread, which measures the aversion of lenders to deal with any but the most creditworthy borrowers, has widened to 65 basis points, or bps, its widest since mid-March 2009, but is far below the record 130 bps hit in October 2008.
However, large Spanish and Portuguese banks are having to pay a higher price to access the interbank market, and this premium could widen if sovereign debt markets sink further.
The political difficulty of assembling an international bailout for a country — the Greek bailout was preceded by months of wrangling between angry governments — suggest the ECB would be the first institution to respond to an expanded crisis.
It could reintroduce emergency measures taken during the global crisis, resuming a program of lending in dollars and Swiss francs over six- and 12-month maturities, or extending its promise to lend banks all the weekly funds they need at fixed rates beyond mid-October.
It might also abandon minimum credit rating requirements for more countries' sovereign bonds when they are used as collateral in its money market operations, as it did for Greece this week.
Its most radical step would be to buy countries' bonds from the secondary market, shouldering their debt — though that would be hugely controversial and hurt the ECB's reputation for conservative monetary policy. Analysts think it might pledge some 200 billion euros in such purchases.
"They've a huge amount of armory at their disposal. They can do a huge amount of things and I think they will be able to stabilize the market at some point," said UBS chief European economist Stephane Deo.
An expanded crisis could also prompt a fresh bailout effort by rich euro zone governments desperate to preserve confidence in their currency and protect their banks from defaults. Analysts estimate a bailout of Portugal, Ireland and Spain might cost around 400 billion euros.
But the political difficulties of agreeing on an expanded bailout could dwarf the challenge which Greece posed. The European Commission is to propose a permanent mechanism for handling such crises on May 12, possibly drawing on a German proposal for a European Monetary Fund. But actually creating the mechanism might require contentious changes to the European Union Treaty that would require many months.
Regardless of how Europe resolved an expanded debt crisis, the reputation of its key economic institutions, which failed to act quickly and decisively to address Greece's troubles, would likely suffer lasting damage among investors.
Stephen Jen, managing director of macroeconomics and currencies at BlueGold Capital, said Portugal would probably also need emergency aid from the EU and the IMF.
"This short-term fix could have serious negative ... consequences for Europe, the IMF, the ECB and the euro," he said, predicting both Greece and Portugal would likely reschedule their debts eventually.
"I maintain my view that there will be no happy ending for Greece."
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