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BRUSSELS — Euro zone finance ministers opened the door Monday to using the currency union’s bailout fund to buy up distressed Greek bonds, thereby cutting the country’s overall debt load as they scrambled to stop the region’s debt crisis from spreading to larger economies such as Italy and Spain.
The ministers’ statement Monday — which came after hours of discussions and was scant on details — followed one of the worst days in the markets for Italy and Spain, the third and fourth largest economies in the euro zone. The fear is that although Europe’s $1.07 trillion bailout fund can support already bailed-out Greece, Portugal, and Ireland — only 6 percent of the euro zone economy — unemployment-ridden Spain and highly indebted Italy are too big to save.
Italy has largely steered clear of the troubles that have engulfed some of its Mediterranean neighbors. But in recent days, Italy has become Europe’s next weak link, harmed in particular by a power struggle between Prime Minister Silvio Berlusconi and his finance minister, Giulio Tremonti.
The dispute threatens to turn the euro zone’s third-largest economy, after Germany and France, into one of its biggest liabilities.
Monday, the Italian government struggled to rein in the tensions as fears rose that political paralysis could make it harder for Italy to embrace the austerity demanded by outsiders to reduce one of the highest debt levels in the world.
Those jitters hit stock markets Monday, not just in Italy, where the major index fell nearly 4 percent, but also across much of Europe, with the markets in France and Germany off more than 2 percent each. The United States was affected too, with the Standard & Poor’s 500-stock index down about 1.8 percent on European debt fears and worries about the showdown in Washington over raising the United States’ debt limit.
The Dow Jones industrial average had its biggest percentage drop in nearly a month. It fell 151.44 points, or 1.2 percent, to 12,505.76. And after closing one point off its 2011 high late last week, the Nasdaq composite fell 57.19, or 2 percent, to 2,802.62.
“Italy is too big to fail,” said Moises Naim, a senior associate in the international economics program at the Carnegie Endowment in Washington. “If Italy really gets hit by contagion because of political mismanagement, it would be a threat not only to the euro zone, but to the global economy.”
The 17 euro zone finance ministers said they “stand ready” to contain the risk of contagion, “including enhancing the flexibility and the scope” of the European Financial Stability Facility, the euro zone’s portion of the overall bailout fund.
They also said that they will consider giving already bailed out countries more time to repay their loans and cutting the interest rates they have to pay.
Although ministers did not explain what this wider “flexibility and scope” will mean in practice, the statement comes after the euro zone’s biggest banks and investment funds called for bond buybacks using money from the bailout fund as part of a plan to get the private sector to contribute to a second bailout for Greece.
Greek bonds are currently trading far below face value. If the bailout fund bought up these bonds at current prices or swapped them for bailout-fund-issued bonds of the same value, that could cut down Greece’s overall debt, which is set to top 160 percent of economic output.
Euro zone banks and investment funds have been locked into negotiations on how they can contribute to a new rescue package for Greece — on top of the $156 billion the country was granted in May. The EU says Greece will need an extra $163 billion to keep it afloat until mid-2014, although some of that money is expected to come from selling state assets.
The finance ministers’ statement was big on promises but low on details, which Jean-Claude Juncker, the prime minister of Luxembourg who presides over the finance ministers meetings, promised would be filled in “shortly, and shortly means as soon as possible.”
As it has so often over the past year and a half, the euro zone finds itself at a new peak in its debt crisis, with leaders in the most threatened countries urging quick action to clarify the plans for a second Greek package, which ministers have been putting off.
“The transition from crisis to crisis, at such a weak stage of recovery, given the cacophony in the press and the insecurity of the public, is a choice that Greece can no longer bear,” Greek Prime Minister George Papandreou said in a letter to Mr. Juncker Monday. “Concerning Greece, it is necessary this time to reach an effective solution that will guarantee the attaining of three basic targets: Debt viability, market access, and the providing of means to restart the growth of the Greek economy.”
Separately, Christine Lagarde, the new leader of the International Monetary Fund, said Monday in Washington that Italy’s economic growth “has to improve” to help bring its deficit down to about 3 percent of its economy in 2012.
The IMF, which contributed about a third of the cost of last year’s bailout fund, is being represented in Brussels by John Lipsky, the IMF’s top deputy.
Ms. Lagarde, in an interview with a group of reporters, said Greece has reduced its debt by an amount equivalent to 5 percent of its economy, “a significant achievement.” But “we all know this is not sufficient. More needs to be done,” she added.