Greek reform more essential 'than ever'


GERMAN AND French leaders said last night it was “more essential than ever” for Greece to implement EU reform measures.

In a telephone conference with Greek prime minister George Papandreou, Chancellor Angela Merkel and President Nicolas Sarkozy said they were “convinced that the future of Greece is in the euro zone”.

Greece’s reform measures would, if implemented, return the country to “sustainable and balanced growth” and “consolidate euro zone stability”.

“The leaders made clear to the Greek prime minister the importance of the strict and effective implementation” of EU-International Monetary Fund reform measures in its austerity programme, according to Dr Merkel’s spokesman, Steffen Seibert.

“This is a condition for the payout of future tranches from the programme,” he added. “The Greek prime minister confirmed the absolute determination of his government to take all necessary measures to implement in their entirety all promises given.”

The statement came at the end of a torrid day in which European leaders sought to calm market fears of a Greek default. However, fears remain high and it was reported last night European finance ministers have been warned confidentially of the danger of a renewed credit crunch as a “systemic” crisis in euro zone sovereign debt spills over to banks.

In a report prepared for ministers meeting in Poland on Friday and Saturday, senior EU officials said the 17-nation currency area faces a “risk of a vicious circle between sovereign debt, bank funding and negative growth”.

“While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic,” the influential Economic and Financial Committee said.

The report highlighted European policymakers’ challenge to restore confidence as the leaders of Germany, France and Greece held crucial talks by video-conference on efforts to avert a Greek default that could cause a global financial shock.

Moody’s Investors Service downgraded two of France’s top banks, Société Générale and Crédit Agricole, saying its concerns about their funding and liquidity profiles had increased in the light of worsening refinancing conditions.

The euro and European stocks were earlier boosted by an announcement by the head of the European Commission that the EU executive would soon present options for issuing a common euro zone bond, despite fierce resistance in Germany.

Many investors see joint debt issuance as the best way out of the crisis, since it would reassure markets that Europe’s strongest economies were taking responsibility for weaker euro zone states.

There is strong opposition in northern European creditor countries to underwriting the debts of what are seen as profligate southern states, making euro bonds a remote prospect.

China added its voice to US concerns over Europe’s apparent inability to stop debt contagion spreading, while Indian and Brazilian officials said major emerging economies were discussing increasing their euro sovereign holdings. US treasury secretary Tim Geithner urged European leaders to act more forcefully to solve the escalating crisis, saying they had the economic and financial capacity to do so.

Italian prime minister Silvio Berlusconi’s government won a parliamentary confidence vote on a €54 billion austerity package, which lawmakers were due to finalise later in the day. The moves have done little so far to stem doubts about whether the euro area’s third-largest economy can manage its debts. – (Additional reporting Reuters)