Greece borrowed short-term funds in the midst of urgent debt rescue talks with the EU and IMF yesterday, but the risks of contagion to the eurozone rose with a credit downgrade for Italy.

Athens raised €1.625 billion in a sale of three-month Treasury Bills yesterday with return to investors stable at 4.56 per cent, the debt management agency (PDMA) said.

The debt-hit nation urgently needs another €8 billion in EU-IMF rescue funds before its money for wages and pensions runs out in October.

“S&P has thrown another spanner in the works of the European sovereign crisis by downgrading Italian debt by one notch to A late last night,” said Dermot O’Leary, an economist at Goodbody Stockbrokers in Dublin.

“With agreement on Greece’s next tranche of aid from the IMF/EU still not reached, European leaders could certainly have done without another destabilising influence. Unfortunately, S&P has given them just that.”

To secure the money, part of a €110 billion bailout released in stages from last year, Finance Minister Evangelos Venizelos was to hold a conference call with head auditors from the European Union, the International Monetary Fund and European Central Bank yesterday evening, his office said.

“The climate is positive, we expect the talks to conclude tonight,” a Finance Ministry source said.

But in a new blow to the eurozone, Standard & Poor’s downgraded Italy’s sovereign debt rating, citing economic, fiscal and political weaknesses. The rating agency said it had downgraded Italian debt to “A/A-1” from a “A+/A-1+” grade because of “Italy’s weakening economic growth prospects”.

It added that Italy’s governing coalition was weak and that this would “limit the government’s ability to respond decisively” to events.

Italy has a ratio of debt to output of about 120 per cent, but its public deficit is not exceptionally high by the standards of eurozone countries in trouble.

But as regards Greece, there is a widespread belief on financial markets that it will default in some way, and that this could have severe contagion effects on rescued countries Ireland and Portugal and also on Spain and Italy.

Greek debt was demoted to junk months ago by all three major rating agencies. The euro slid to $1.3659 from $1.3692 late in New York on Monday, but European stocks showed gains, rallying from initial weakness in response to the downgrade.

The first round of talks between Greece and auditors from the EU and IMF yesterday was “productive and substantive,” the Finance Ministry said in an emailed statement.

The audit had been suspended in early September, with sources close to the mission citing lack of progress in reform and placing the release of a 8 billion loan slice at risk.

Greece is under pressure to plug a budget hole of more than €2 billion under the terms of a €110 billion EU-IMF bailout contracted last year.

And a new EU aid package worth €159 billion cannot be finalised without a positive conclusion to the latest fiscal audit. The government announced last week a new hefty property tax and is expected to make further cuts in the country’s massive state payroll after the Finance Minister admitted there was “surplus” staff in the civil service.

Greek daily To Vima on Sunday said a senior finance ministry official had warned other departments that the EU and IMF were demanding progress on 15 measures including pension freezes, state company mergers and civil service lay-offs. And Kathimerini daily reported on its website late on Monday that Prime Minister George Papandreou was considering calling for a referendum on whether Greece should continue to tackle its debt crisis within the eurozone or by exiting the single currency. “This is nonsense,” the Finance Ministry source said.

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