EU finance ministers, Greece wrangle over immediate loan to avoid default and over 2nd bailout

LUXEMBOURG – The drama over Greece’s imploding finances moved Sunday to Luxembourg, where eurozone ministers must approve an immediate loan to keep Greece from defaulting next month but will wrangle fiercely over lending terms for the billions needed in a second massive bailout.

The meeting of the 17 eurozone nations comes after a tumultuous week that saw rioting on the streets of Athens, a Greek Cabinet reshuffle, days of market turmoil that sent borrowing costs spiking and Germany softening its demand on the extent that banks and other private lenders share the risks of any new loans to Greece.

On only his third day in office, Greece’s new finance minister, Evangelos Venizelos, faced his first big test Sunday – negotiating the vital second bailout package with Greece’s frustrated international creditors.

In Athens, Greek Prime Minister George Papandreou confirmed that talks were under way over the second bailout, which he said was “roughly equal” to the first €110 billion ($157 billion) rescue the country accepted over a year ago.

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The finance ministers can’t be happy that their previous estimate for solving Greece’s debt problems was so far off-base. And they will press Venizelos on many fronts – to control Greece’s budget overruns, to solve setbacks in cost-cutting reforms, and to push ahead with a €50 billion ($70.5 billion) sell-off of Greek government assets.

The eurozone and the International Monetary Fund have based their approval of new money on Greece passing budget cuts worth some €28 billion ($40 billion) before the end of the month, as well as starting the unpopular privatization program. Those measures have already sparked angry protests and forced Papandreou to reshuffle his government.

The IMF and Germany, the two single biggest contributors to Greece’s existing bailout, have already had to back away from previous demands as panic swelled in markets around the world, giving Europe and Greece more space to sort out their differences.

Venizelos sounded upbeat on the way into the conference centre.

“It is a great opportunity for me to repeat the strong commitment of the Greek government and the strong will of the Greek people for the implementation of the program,” he said.

The IMF has indicated it will sign off on its portion of the next loan installment even if a new, longer-term bailout program has not yet been finalized. That €12 billion ($17 billion) must land in Greece’s account by mid-July to repay billions of euros in maturing bonds and fend off a default.

However, Belgian Finance Minister Didier Reynders on Sunday raised the possibility of only releasing €6 billion ($8.6 billion) for the moment. That would cover a first round of bond redemptions in July, but would leave Greece short of money for a new bond repayment deadline in August.

Germany, meanwhile, softened its stance on the second Greek bailout, with Chancellor Angela Merkel saying any private-sector contribution to the second bailout will be voluntary. That won’t spark a partial Greek default that would slam Greek and European banks, roil financial markets and affect other debt-challenged nations like Portugal, Ireland or Spain.

The exact role of the private sector in the new bailout will feature prominently in talks that will continue Monday morning. Jean-Claude Juncker, the prime minister of Luxembourg who also chairs the eurozone finance meetings, told reporters not to expect a final deal Sunday night.

Just over a year after its first bailout, Greece is trailing its financial goals. Without passing the new austerity measures, its budget deficit will remain above 10 per cent of economic output this year – far from the promised 7.5 per cent. The country’s debt is expected to reach 160 per cent of gross domestic product by the end of 2011, while its economy continues to shrink.

The harsh austerity measures and the bleak outlook for the depressed Greek economy and the resulting street protests are increasingly challenging the survival of Papandreou’s government.

Opening a three-day parliamentary debate that will culminate in a confidence vote Tuesday, Papandreou blamed Greece’s bloated and inefficient state sector for bringing the country to its knees. He vowed deep changes with a fall referendum on the constitution that would make it easier to get rid of inept officials or workers.

Many experts say Greece’s debt load is too great and expect it to eventually default. The European Central Bank, however, has been adamant that a Greek default is unthinkable because it could set off an unpredictable financial chain reaction.

In Germany, skepticism persisted over whether another massive aid package will be sufficient to stabilize Greece, with several lawmakers from Chancellor Angela Merkel’s coalition government saying a Greek debt restructuring is all but inevitable.

“We need a haircut on the debt – and that won’t happen voluntarily,” conservative lawmaker Manfred Kolbe told the German news magazine Der Spiegel.

Germany, as Europe’s largest economy, funds much of the bailouts to weaker members, a fact that has angered many ordinary citizens. A poll showed that almost every second German thinks Greece should leave the eurozone and return to its old individual currency.

In the poll published by Focus news magazine, 46 per cent said Greece should return to the drachma, but 47 per cent of the 1,000 people surveyed by pollster TNS Emnid said Greece should remain in the eurozone. No margin of error was provided for the poll.


Demetris Nellas in Athens and Juergen Baetz in Berlin and David McHugh contributed to this report.

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