Finance ministers hope emergency credit averts Greek tragedy

ANALYSIS:Talks between EU leaders are focusing on the prospect of bilateral and multilateral loans

EURO ZONE finance ministers are racing to set up an emergency credit line for Greece after European leaders pledged to take determined action “if needed” to avert any default by the beleaguered country.

European Council president Herman Van Rompuy, who issued a joint statement from EU leaders in support of Greece at an economic summit in Brussels, said no other country was discussed in talks behind the scenes between EU leaders.

“We only spoke about Greece; that’s the only topic we mentioned. We didn’t even mention other countries. It concerns Greece and only Greece,” he told reporters.

“Euro area member states will take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole,” the statement said.

The statement also made it clear that the Greek government has not requested any financial support from Europe.

While the statement did not set out how Europe would provide extraordinary aid to Greece, euro-zone finance ministers are known to be discussing the prospect of bilateral and multilateral loans to Greece.

Having received a mandate from EU leaders to bring forward such plans, they will discuss the initiative at their scheduled monthly meeting in Brussels next Monday evening.

Some informed sources believe the broad parameters of the plan could be agreed by Tuesday when all finance ministers in the EU hold their scheduled monthly meeting.

Although any bilateral aid would not of its nature come directly from EU funds, senior European officials who briefed the discussions said any rescue package would operate within the framework of EU institutions such as the euro group.

Although Van Rompuy’s statement said Greece would draw on the expertise of the International Monetary Fund (IMF), it is considered unlikely that the EU would call on the IMF as they remain convinced that a solution to the country’s problems rests within the union’s current powers.

Equally, officials believe that it would be “premature” at this point to make preparations for the introduction of European bonds.

Germany and France are expected to take the lead in any exceptional support for Greece as Italy and Spain, the other major economies in the euro zone, are themselves under financial pressure.

Although bilateral and other loans are the favoured rescue mechanism at present, other options discussed have included the possibility of Germany buying Greek sovereign bonds via a state-owned bank. The early release of structural funds was also discussed.

The decision to explicitly back extraordinary support for Greece followed talks involving Van Rompuy, German chancellor Angela Merkel, French president Nicolas Sarkozy, European Central Bank chief Jean-Claude Trichet, European Commission president José Manuel Barroso and Greek prime minister George Papandreou.

Spanish prime minister José Luis Rodríguez Zapatero, whose country holds the EU’s six-month rotating presidency, and Euro group chairman Jean-Claude Juncker were also involved.

While high-level European sources had indicated in private that Greece would not be abandoned, yesterday’s move followed an upsurge in pressure on the Spanish and Portuguese governments over their large budget deficits.

Keen to avoid a contagion effect taking hold, EU leaders decided in recent days to make explicit the implicit guarantee enjoyed by all euro members.

With Papandreou still arguing that Greece has the capacity to surmount the crisis from its own resources, EU leaders urged to continue with efforts to stabilise its public finances.

His current efforts are seen in European circles as a last-ditch effort to stabilise his public finances before any European intervention.

Any such intervention would have to be accompanied with stringent policy direction from Brussels, sources said.

Papandreou faces a crucial hurdle in the next fortnight when private sector workers plan strike action.

The bulk of his €50 billion borrowing requirement this year must be funded by June.

“All euro area members must conduct sound national policies in line with the agreed rules. They have a shared responsibility for the economic and financial stability in the area,” the statement from EU leaders said.

“In this context, we fully support the efforts of the Greek government and their commitment to do whatever is necessary, including adopting additional measures to ensure that the ambitious targets set in the stability programme for 2010 and the following years are met.

“We call on the Greek government to implement all these measures in a rigorous and determined manner to effectively reduce the budgetary deficit by 4 per cent in 2010.”