Greek woes prompt wider euro zone anti-crisis push

By Jan Strupczewski and Dina Kyriakidou

MADRID/ATHENS (BestGrowthStock) – Finance ministers agreed in principle on Friday to create a permanent mechanism to handle economic crises in the euro zone amid preparations for an unprecedented aid package for debt-stricken Greece.

Ministers from the 16 countries in the euro zone reviewed events since announcing the standby loan package for Greece last Sunday and took a first step toward something more permanent to cope with difficulties the bloc might face in the future.

“We’ve reached an agreement that we need to set up a permanent crisis (resolution) mechanism,” Luxembourg Prime Minister Jean-Claude Juncker told a news conference in Madrid, where he chaired the talks.

The European Commission, the European Union executive, plans to air proposals on the issue on May 12. The comment from Juncker suggested the scramble to come up with a plan for Greece under intense financial market pressure had prompted a push to improve crisis-resolution more generally.

Athens, meanwhile, sought to clarify further details of how an emergency loan package provided by its euro zone peers and the International Monetary Fund would work, if necessary.

Greek Prime Minister George Papandreou told parliament that any request to activate the 40-to-45 billion euro ($56 billion-$63 billion) financial aid mechanism would be made in the country’s best interest if needed.

“We are taking all the preparatory actions required,” said Papandreou, whose Socialist government has announced drastic austerity measures in a bid to slash its deficit and allay financial market fears about its ability to honor its debts.

The European Commission, European Central Bank and IMF will send officials to Athens on Monday to discuss further aspects of what would be the first such financial rescue of a euro zone country in the 11 years since the launch of the common currency.

“It is a matter of preparing a joint program of conditionality and financing if needed and if requested,” said European Economic and Monetary Affairs Commissioner Olli Rehn.

GREECE NOT YET ASKING

As it struggles to refinance a debt bigger than its economic output, Greece moved closer to activating that international aid when it said in a letter released to the media on Thursday that it was seeking talks with the IMF and European authorities.

Juncker said Athens had not requested activation of the aid mechanism — under which euro zone capitals would lend Greece up to 30 billion euros in the initial year and the IMF would stump up additional money, perhaps 10 billion euros or more.

Financial markets, where Athens needs to roll over some 53 billion euros of sovereign debt this year with a big chunk before May 19, remained edgy, with Greek 10-year bond yields rising to 7.3 percent on Friday.

The spread, or premium, investors demand to hold that debt over what they require to buy safer German bonds surged to more than 440 basis points at one stage, compared with 415 at Thursday’s settlement, Tradeweb data showed.

The euro weakened 0.8 percent against the dollar.

An opinion poll released on Friday showed support for Prime Minister Papandreou had risen even if his voters were unhappy about austerity measures that include pay freezes and tax increases to try to stabilize the country’s debt.

Two thirds of Greeks are dissatisfied with the government’s performance but still overwhelmingly support it over the conservative opposition, while support for Papandreou himself rose to 68 percent, from 66 percent in March, the poll conducted by Public Issue for Skai TV showed.

Essentially, Greece and its potential rescuers are trying to ensure all is in place for if and when aid has to be rolled out.

Greece next tests market readiness to finance it when it tries to raise 1.5 billion euros via an auction of three-month T-bills on April 20. In recent short-term funding operations, it has had to pay far higher returns to investors than it did before the crisis blew up.

LONGER TERM

On longer-term planning for the euro zone, little emerged in Madrid on the shape a more permanent anti-crisis mechanism might take or the political will to take the Greek crisis as a cue for closer pan-European coordination in key areas.

German Finance Minister Wolfgang Schaeuble, who was not in Madrid, said in a newspaper interview in March that he planned to make proposals soon on a new European monetary fund to help ensure the stability of the euro zone.

On a related matter, Commissioner Rehn said improvements to policy coordination should include reviews at euro zone level of draft budgets before they are approved in national parliaments, which would give a better picture of fiscal challenges in a timely fashion.

German Deputy Finance Minister Joerg Asmussen distanced himself quickly from that idea.

“It is quite clear that national budget authority has to remain unrestricted, although we are obviously subject to the rules of the (EU) Stability and Growth Pact,” Asmussen told reporters in Madrid.

Mario Draghi, head of Italy’s central bank and a member of the ECB’s Governing Council, said consideration of changes to EU rules and structures to avoid a repeat of the Greek crisis was embryonic for now.

“There is still a great lack of detail and we are still at an extremely early stage. It’s still under discussion and no one has a clear idea,” he said.

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Greek woes prompt wider euro zone anti-crisis push