TOPWRAP 3-EU works on mechanism to stop Greek contagion

* Leaders have agreed on need for mechanism to stem crisis

* Euro zone leaders formally approved Greek loans Friday

* G7 discusses Greek situation, Obama talks to Merkel

(Adds Finnish/Austrian comment, Obama, Portugal, Greek polls)

By Julien Toyer and Jan Strupczewski

BRUSSELS, May 8 (BestGrowthStock) – European Union officials were
working out the details of a financial support mechanism on
Saturday to prevent Greece’s debt turmoil spreading to Portugal
and Spain, ready for approval by EU finance ministers on Sunday.

The leaders of the 16 countries that use the single currency
said on Friday after talks with the European Central Bank and
the executive European Commission that they would take whatever
steps were needed to protect the stability of the euro area.

Both Italian Prime Minister Silvio Berlusconi and French
President Nicolas Sarkozy cancelled trips to Moscow to mark the
anniversary of the end of World War Two in order to continue
consultations over the crisis, though German Chancellor Angela
Merkel said she would still go.

President Barack Obama said he was “very concerned” about
Greece’s debt turmoil and stressed that stabilising the country
was vital for both Europe’s and the United States’ economic
wellbeing. [nN08182353]

Financial markets have been pounding euro zone countries
with high deficits or debts as well as low economic growth,
threatening to force Portugal, Spain and Ireland into a position
where, like Greece, they would need to seek financial aid.

A Portuguese government source said Lisbon had promised its
European Union counterparts to cut the country’s budget deficit
further than planned this year, to 7.3 percent of GDP instead of
8.3 percent, by suspending some public works including a new
international airport for the capital. [nLDE6470F2].

The euro zone leaders, who have been accused of heightening
market uncertainty with a lack of action, agreed to accelerate
budget cuts and ensure deficit targets are met this year.

But they also decided, under pressure from the markets, to
ask all 27 EU countries to agree a financial mechanism to
ring-fence the Greek crisis before markets open on Monday.

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For an overview of stories on the crisis [nTOPNOW2]
Graphic on euro’s performance http://r.reuters.com/vyh72k
Euro zone crisis in graphics http://r.reuters.com/fyw72j
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

“WORST CRISIS”

“The euro zone is going through the worst crisis since its
creation,” Sarkozy said after Friday’s euro zone summit in
Brussels. [nLDE6461QJ]

“The leaders have decided to put in place a European
intervention mechanism to preserve the stability of the euro
zone. The decisions taken will have immediate application, from
the point that financial markets open on Monday morning.”

Finnish Prime Minister Matti Vanhanen said on Saturday: “If
the domino effect begins, no economy is safe.”

Fears that a euro zone debt crisis could rock banks and the
global economy like the Sept. 2008 collapse of U.S. bank Lehman
Brothers have swept through markets this week, pushing global
stocks to around a three-month low.

If the new EU mechanism did not stabilise the markets, “we
may be in a situation where one recession is followed by
another”, Vanhanen said.

He said the contents of the new arrangement would emerge on
Sunday. “Whether it contains already a sum of money, a fund,
that can be taken into use, or a mechanism, with which the
Commission or the Union can itself quickly take a loan, all this
will be resolved tomorrow.”

Euro zone sources said late on Friday that the mechanism
could be funded by bonds issued by the European Commission with
guarantees from euro zone states. [nLDE647004]

No details have been disclosed so far, but the sources said
EU law provided a legal basis for such a mechanism.

The treaty governing the EU says that if a member of the
27-nation bloc is in difficulties caused by circumstances beyond
its control, EU ministers may grant it financial assistance.

“Two mechanisms have been agreed — one based on article
122.2 of the Treaty saying the council can help a member state
with serious difficulties,” one of the sources said.

“The other will enable the European Commission to go on the
markets and get money with an explicit guarantee of the member
states and an implicit guarantee of the ECB (European Central
Bank,” the source added.

A second source said: “The details of this mechanism will be
agreed by Sunday and the idea is to trigger both on Sunday.”

EMERGENCY LOANS

Friday’s EU summit approved $110 billion euros ($147
billion) in emergency EU/IMF loans to Greece over three years to
help it over a budget crisis in exchange for austerity measures
so sharp that they have already sparked violent protest.

Two polls released on Saturday showed a majority of Greeks
support further strikes and demonstrations, though a third
showed only 28 percent backing. [nLDE6470AL] Three people were
killed in a petrol bomb attack in Athens during mass protests on
Wednesday.

Germany’s highest court on Saturday rejected a request by
five academics to block the release of Germany’s share of the
Greek rescue package, approved by parliament on Friday.
[ID:nLDE64704P]

Chancellor Merkel, who had initially resisted agreeing to
Greek aid due to strong public opposition at home, told voters
in a regional election taking place on Sunday that euro zone
countries would “lead this fight for the stability of the euro
together and with resolve”.

She said this did not only mean financial discipline.

“Those who created the excesses on the markets will be asked
to pay up — those are in part the banks, those are the hedge
funds that must be regulated … those are the short-sellers and
we agreed yesterday to implement this more quickly in Europe.”

Austrian Chancellor Werner Faymann told ORF radio that EU
treaty changes might be required — an arduous process in the
27-nation bloc.

“The real fight against speculation won’t happen in the next
48 hours,” he said. “To seriously fight speculation, we will
have to come up with much more than what we’ll get in the next
couple of weeks.”

Penny Stocks
(Writing by Kevin Liffey and Mark Trevelyan)

TOPWRAP 3-EU works on mechanism to stop Greek contagion