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EU set to release more loans to keep Greece afloat

19 June 2011, 23:48 CET
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EU set to release more loans to keep Greece afloat

Venizelos - Lagarde - Photo EU Council

(LUXEMBOURG) - Eurozone finance ministers, gathering in Luxembourg Sunday, were set to release more loans to keep Athens from default in the summer and mull the shape of a second major bailout to appease nervous markets.

At the start of a crunch week for debt-laden Greece, the ministers from the 17 nations using the euro were to begin talks at 7:00 pm (1700 GMT).

Among them is Greece's Evangelos Venizelos, the former defence minister parachuted in on Friday to manage the crisis for a reshuffled government facing a vote of confidence over its tough austerity plans.

In Athens, Prime Minister George Papandreou urged the nation's politicians to unite in a confidence vote expected late Tuesday "because the country finds itself at a crucial point."

Greece'seuro partners are expected to approve loans of over 8.7 billion euros ($12.5 billion), its share of a 12-billion-euro tranche of bailout funding for the stricken economy.

A further 3.3-billion-euro portion from the IMF should follow once an outline deal on financing through to the end of 2014 is agreed.

These will be the fifth tranche of payouts from a 110-billion-euro ($156 billion) EU-IMF loan package agreed last year.

Over talks running through Monday with the other 10 EU states, the real work for the European finance ministers revolves around sharing the burden of a new, lasting rescue package between taxpayers and the private sector.

"In my view there are two red lines that should be entirely respected: it should not trigger credit events nor credit default," said European Union president Herman Van Rompuy, with an eye on a full summit of EU leaders in Brussels on Thursday and Friday.

Some such as Britain have vowed to resist being sucked into contributing as with previous bailouts for Ireland and Portugal. Britain said Sunday it would not help beyond its contributions through the IMF.

The idea is to come up with a second loan package of around 100 billion euros.

This time, it will be a combination of more loans from European partners and the IMF, plus a crucial contribution from the banks, as well as proceeds from Greek privatisations and other reforms ranging from deeper austerity cuts to tax rises.

The demands for more Greek action on its deficit lie behind a wave of protests verging on civil unrest in Athens, triggered by planned privatisations and a four-year austerity programme including 28.4 billion euros of fiscal belt-tightening.

The protests, along with defections in the ruling party, have created renewed political urgency for Papandreou, who will arrive in Brussels for pre-summit lobbying on Monday.

With 350 billion euros of debts, meaning massive interest payments and redemption bottlenecks to service or re-negotiate, the threat is that Greece may have no option but to default if it cannot finance its government commitments.

Even if banks agree to wait years to get their investments back by 'rolling over' existing bonds, the worry is still that credit rating agencies who drive up the cost of borrowing will view the arrangements as a de facto partial default.

German and French savers hold the biggest amounts of Greek debt, but leaders worry that further markdowns would spread to other vulnerable or bigger eurozone economies such as Belgium or Italy, undermining the entire currency area.

After Moody's Investors Service warned of risks to the sovereign rating of Italy, Luxembourg Prime Minister Jean-Claude Juncker, who chairs the Eurogroup of finance ministers from the shared currency area, said: "We are playing with fire."

The European Central Bank, backed by France, sees dangers in twisting banks' arms into anything more coercive than a "voluntary" rollover, and German Chancellor Angela Merkel conceded on Friday that the euro guardian must be satisfied with the contours of the deal.

Merkel still needs to win political support from her governing coalition.

"We must be sure to try to have a substantial contribution" from private creditors, Merkel told her Christian Democrat Union party after backing down on earlier hardline demands at talks Friday with French President Nicolas Sarkozy.

Berlin now says it will support a deal along the lines of one done to keep the Romanian banking system afloat in 2009.

Economic and Financial Affairs Council

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