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European stocks
rose modestly and the euro halted its decline Thursday, a day after the
International Monetary Fund promised to increase the 45 billion-euro
aid package for Greece to as much as 120 billion euros over three years
to quell the fund’s biggest crisis since the Asian woes of 1997.

The fund is racing
to conclude an agreement for more painful austerity measures from
Greece by Monday, clearing the way for the government to receive
funding and reassuring investors worldwide that European debt is safe.
On Wednesday, Dominique Strauss-Kahn, the I.M.F.’s forceful managing
director, made the higher aid pledge in a private meeting with German
legislators. The package would be the equivalent of up to $160 billion
and would come from both the I.M.F. and from other countries using the
euro.

But as has
frequently been the case during Europe’s debt crisis, the promise of
help was overshadowed by more disturbing news – in this case a cut in
the debt rating of Spain by a major agency just a day after downgrades
for Portugal and Greece.

The growing fear is
that the fallout from Greece and even Portugal – which together compose
just 5 percent of European economic activity – could be a mere sideshow
if Spain, with its much larger economy, has difficulty repaying its
debt.

In European morning
trading, the euro was at $1.3237, up slightly from $1.3220 late
Wednesday in New York. The Euro Stoxx 50 index, a barometer of
euro-zone blue chips, rose 0.8 per cent, and the FTSE-100 index in
London rose 0.5 per cent.

Trading in U.S.
index futures suggested Wall Street stocks would open slightly higher,
after the Dow Jones industrial average rose 53 points Wednesday to
close at 11,045.27.

Most major Asian
markets fell, with both the Hang Seng index in Hong Kong and the
S&P/ASX 200 index in Sydney dropping 0.8 per cent. Tokyo markets
were closed for a holiday.

In many ways, the
current troubles in Europe go to the heart of the fund’s new mission to
serve as a firewall in the financial crisis – an objective that was
bolstered by $750 billion in fresh capital from Group of 20 countries
last year.

Unlike its previous
efforts in smaller, emerging economies in Asia in 1997, and more
recently in Hungary, Romania, Latvia and Iceland, the fund has been
hamstrung in its efforts to act quickly and decisively by political
concerns within the European Union, which insists on assuming a leading
role.

“It is a problem,”
said Alessandro Leipold, a former acting director of the I.M.F.’s
European department. “It should not be that difficult – they did it in
Hungary and Latvia. But the egos are different in industrialized
countries.”

A stitch in time

A case can be made
that if Greece had sought help from the fund late last year after the
forecast for its budget deficit doubled, the amount of support needed
to reassure investors would have been much less than the 120 billion
euros that even now might not be enough.

In that vein, Mr.
Leipold said Portugal and Spain should ignore any stigma associated
with an I.M.F. program and make the case to the European Commission in
Brussels that asking proactively now for aid would soothe skeptical
markets and save Europe billions in the future.

“The market has seen its worst fears come true,” he said. “What it needs is a surprise on the upside.”

Concerns have
already surfaced in Congress that the broad demands of the sovereign
debt crisis will quickly exhaust the I.M.F.’s reserves and leave the
United States, the fund’s largest shareholder, with the bill.

Representative Mark
Kirk, a Republican from Illinois, said such a drain could occur if
Portugal, Ireland and Spain sought I.M.F. aid at the same time. Mr.
Kirk worked at the World Bank during the 1982 debt crisis in Mexico,
which came close to depleting the fund’s reserves.

“We have seen this movie before,” he said. “Spain is five times as big as Greece – that would mean a package of 500 billion.”

Mr. Kirk sits on
the House Appropriations Committee that oversees I.M.F. funds and said
that he had already asked for hearings on the fund’s ability to handle
a European collapse.

In Athens, the
Greek government had no choice but to seek an I.M.F. solution after its
costs of borrowing skyrocketed, but that has not made the negotiations
for aid any easier.

The fund has sent
one its most senior staff members, Poul Thomsen, who has overseen
complex fund negotiations in Iceland and Russia, to assist Bob Traa,
the official responsible for Greece, to work out a solution.

According to people
who have been briefed on the talks, the aim is to secure from Greece a
letter of intent for even deeper budget cuts than the tough measures
imposed so far, like reductions in civil service pay, in exchange for
emergency funds.

With Greece now
shut out of the debt markets, it has little leverage to resist –
especially in light of the 8 billion euros it needs to repay
bondholders on May 19. Analysts expect a deal by next week at the
latest.