Unless eurozone countries acted swiftly to shore up the Greek economy and allay investor fears, problems could spread to other much bigger economies causing an "undesirable domino effect", two leading economists have said.

Eurozone countries have to chip in and sustain the Greek economy "whatever the sacrifice", veteran economist Karm Farrugia said.

"Although the Greeks have to undertake painful reforms it is in the long-term interest of all eurozone countries to see Greece does not fail," he said, insisting the bailout was necessary to maintain investor confidence in the euro.

Greece has a rather small economy when compared to the whole of the eurozone and it should not be allowed to drag down the rest of the countries with it, he maintained.

The euro dropped to a new one-year low on Wednesday after rating agency Standard & Poor's slashed Spain's credit status amid fears that problems in Greece would create a contagion effect.

Greece's debt was downgraded to "junk" status on Tuesday, the first eurozone country to face such a prospect. This effectively means Greece will be unable to tap private credit to refinance its debt. Standard and Poor's also downgraded Portugal's debt.

The euro edged slightly upwards yesterday on news that eurozone countries were close to agreeing on an aid package for Greece. Finance Minister Tonio Fenech said in Parliament Malta would be lending Greece about €27 million as part of the multi-billion package.

Economist Joe Vella Bonnici said the situation hinged on the financial support Germany was ready to make available.

As Europe's largest economy, Germany plays a crucial role in any rescue deal but Chancellor Angela Merkel has yet to convince an unsympathetic electorate opposed to a Greek bail-out.

"The Greek problem risks creating a domino effect on other eurozone economies and if taken to its extreme it could even lead to the collapse of the euro altogether. In 2008, the financial crisis started in the sub-mortgage market but eventually led to a global recession," Mr Vella Bonnici said.

Portugal had the second weakest economy after Greece but Spain and Italy were also in choppy waters.

The problem was complex, he added, and Germany had to keep a balance between bailing out Greece to avoid more problems and not being seen to support dishonest governments.

The Greek economy ran to ground after years of fiscal mismanagement and government meddling with official figures that went unnoticed by the European Commission. The country now has a mountain of debt and a spiralling deficit.

"It is in nobody's interest to see the euro with its back against the wall but we need urgent action by the eurozone's big economies. It is all a question of confidence," Mr Vella Bonnici said.

Both economists agreed this was the euro's first real test since it became legal tender eight years ago.

"The euro is a relatively new currency and has not yet passed through a trauma like other major currencies. This is its primary disadvantage because investors will be looking anxiously at how it will come out of this problem," Mr Farrugia said.

The single currency is also hampered by the fact that the eurozone is composed of 16 sovereign countries with different fiscal policies.

"A government is normally in charge of monetary and fiscal policy, taking those corrective measures it deems necessary on both fronts. However, this is not the case with the euro since fiscal policy is up to the individual member states and this is a handicap because drastic corrective measures are very hard to come by," Mr Farrugia pointed out.

On joining the eurozone, a country cedes its sovereignty in determining monetary policy to the European Central Bank. However, this is not the case with taxation because each country retains the power to determine its own system of taxes.

As part of the eurozone, Malta will not escape the direct impact if problems escalate beyond the Greek borders. According to Mr Vella Bonnici, although a weak euro is beneficial to Maltese companies that export in dollars outside the eurozone, such as STMicroelectronics, it also makes imports such as oil more expensive.

"Higher oil prices could lead to higher inflation, which will erode competitiveness and possibly cancel out the positive effects of a weak currency," he said.

The head of the International Monetary Fund on Wednesday warned that the crisis in Greece could spread throughout Europe and every day lost in resolving it risked spreading the "consequences far away".

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