More downgrades, mass strike as EU counts days to summit

It cited debt-laden banks and low growth prospects in its statement, noting: "Since placing the ratings under review in late July 2011, no credible resolution of the current sovereign debt crisis has emerged and it will in any event take time for confidence in the area's political cohesion and growth prospects to be fully restored."

The same day Standard & Poor's cut grades for three major Italian banks - Monte dei Paschi di Siena, Banco Popolare and UBI Banca - as well as 21 local-level lenders. "Funding costs for Italian banks ... will remain noticeably higher than those in other eurozone countries unless the Italian government implements workable growth enhancing measures and achieves a faster reduction in the public sector debt burden," it said.

The rating agencies' pressure on EU leaders to come out with a big bang solution at their meeting on Sunday follows an ultimatum from the G20 club of rich countries that Europe must take decisive action in order to fend off a global recession.

Two EU commissioners in separate statements on Tuesday added to the doomsday atmosphere.

EU economic affairs commissioner Olli Rehn in a speech in Lisbon said Portugal is unlikely to meet its EU and IMF bail-out targets. "There are risks to attaining the 2011 deficit target as specified in the programme," he said. EU trade commissioner Karel De Gucht said in Berlin the EU is at "two minutes to midnight" and that a failed summit would cause "truly incalculable economic and political costs."

Pressure is also building from the ground up for solutions which do not involve slashing public sector wages, higher taxes and fewer services.

The main private and public sector trade unions in Greece on Wednesday and Thursday plan to shut down air, road and train transport as well as various government departments, large and small businesses and most shops. The latest strike comes ahead of a vote in parliament on a new round of austerity measures designed to meet bail-out demands.

The €2 trillion question

In an article which saw US markets rally, UK daily The Guardian on Tuesday reported that France and Germany have already reached agreement to boost from €440 billion to €2 trillion the effective firepower of the EFSF, the EU's Luxembourg-based rescue fund. It added that leaders will inject an extra €100 billion to €200 billion into vulnerable banks.

In bad news for markets, it also said private bondholders will be asked to write off between 30 percent to 50 percent of Greek debt, instead of the 21 percent agreed in July.

The Financial Times Deutschland said the EFSF will go up to €1 trillion.

An EU official speaking to the Dow Jones financial newswire poured cold water on the reports, however. "We may have a decision on the size by the summit or just a statement that firepower must be increased. But there is no talk about an amount around €2 trillion," the anonymous source said.

For its part, Germany, which is to a large extent bankrolling the rescue measures and which expects lower than forecast growth at home next year, is trying to dampen expectations of an EU summit panacea.

Chancellor Angela Merkel on Tuesday built on earlier comments by her finance minister Wolfgang Schaeuble that the G20 ultimatum is unrealistic. "The EU summit is an important step but further steps will follow ... These sovereign debts have been built up over decades and therefore one cannot resolve them with one summit but it will take difficult, long-term work," she told a press conference in Berlin.

If the Sunday meeting manages to calm markets, it carries a different risk of deepening divisions between euro-using and non-euro EU countries.

Polish EU affairs minister Mikolaj Dowgielewicz on Tuesday warned that plans to split the event in two - an EU27 session and a eurozone17 session - are unwelcome in Warsaw. "Decisions on the eurozone should be taken in the presence of those who will in future find themselves in the eurozone, or - an even better solution - amidst all EU member states," he told Polish press agency Pap.