Greeks strike over cuts, EU goes slow on new aid

ATHENS/BRUSSELS Wed May 11, 2011 1:07pm EDT

1 of 3. Riot policemen run through a cloud of teargas to avoid fire from an exploding petrol bomb during clashes with youths in central Athens, May 11, 2011.

Credit: Reuters/Yannis Behrakis

ATHENS/BRUSSELS (Reuters) - Greek police clashed with stone-hurling youths and thousands protested against austerity in Athens on Wednesday as EU and IMF envoys began talks with the government on stepping up fiscal reforms.

After bailing out Greece one year ago, European governments have concluded that additional aid may be necessary as Athens struggles to meet its economic targets and win back the confidence of investors, who now believe it will eventually have to restructure its debt mountain.

EU finance ministers will discuss the Greek crisis next week but are not expected to decide on any new support measures until the mission that began on Wednesday gives its verdict on progress on reforms.

A euro zone source told Reuters that the ministers were likely to tell Greece it must deliver on savings and privatization targets already agreed if it wants new emergency financing next year.

"There will be debate on Greece next week. No decision will be taken," Joerg Asmussen, Germany's deputy finance minister said.

The euro had risen on Tuesday on a report, later denied, that a new 60 billion euro rescue for Greece was on the cards.

But it fell back to $1.4225, a three-week low, on Wednesday amid doubts that Europe would provide timely aid to both Greece and Portugal.

In a positive sign for Portugal, Finland's Prime Minister-elect Jyrki Katainen said he had clinched a deal with the country's number two party, the Social Democrats, to back a bailout for Lisbon.

That came after Finland's eurosceptic True Finns party had vowed to vote against the aid package in parliament, a key hurdle for the bailout.

The EU/IMF mission to Greece will focus on a 2011-2015 fiscal plan and on Greek progress in raising 50 billion euros from privatizations.

Markets are braced for some form of debt restructuring in the long-run as Greece labors under a 327 billion euro debt mountain.

Ten-year Greek bonds currently change hands at around 55 percent of their face value, carrying a secondary market yield of 15.7 percent. They were little changed on Wednesday but up more than 3 percentage points since the start of the year.

"EXPLOSIVE MIX"

One year into their austerity plan, Greeks are tiring of sharp spending cuts and tax rises that threaten their way of life.

Police fired teargas at protesters in Athens and some 20,000 protesters -- fewer than in previous demonstrations -- marched to parliament as part of a 24-hour nationwide strike against the Socialist government's austerity drive.

"People feel they can't make ends meet and at the same time believe that these policies are not effective. This is an explosive mix," said Costas Panagopoulos at ALCO pollsters.

Germany, which as Europe's largest economy sees itself as the paymaster of loans for Greece, Ireland and now Portugal, has made it clear there can be no further aid or easing of the terms of credit without fiscal commitments in return.

Chancellor Angela Merkel threw her support behind Italian Mario Draghi to become the next president of the European Central Bank on Wednesday, a move which may be unpopular at home and could increase pressure on her to win victories on other issues such as aid.

French Finance Minister Christine Lagarde sought to reassure investors that, while extra aid for Greece was not yet decided, a debt restructuring was out of the question.

In the end, further support for Greece -- and maybe fellow bailed-out euro zone nations Ireland and Portugal too -- is likely to be more palatable to EU leaders than a full-on restructuring which would hit Europe's banks hard.

"Nobody wants to keep funding countries in difficulty like this. But we absolutely must do it because a sovereign debt restructuring would send such a negative message to investors that the whole zone would suffer, the cost of refinancing for all its members would soar," Lagarde told Le Figaro.

FINNS HOLD UP PORTUGAL AID

The monthly meeting of finance ministers on Monday is also unlikely to decide on lowering the interest rate on the bailout for Ireland, which like Greece is keen to lower funding costs.

Dublin is clinging tight to its ultra-low corporation tax despite demands from Germany and France that it be raised. It is also wary of enacting speedier austerity measures in return for better terms on its 85 billion euros loans.

"We have not only to cure a broken economy but we have to hold together a society," Minister for Public Expenditure Brendan Howlin said when asked why the government did not accelerate cutbacks.

Portugal hopes euro zone finance ministers will approve its 78-billion-euro aid plan on Monday and will be cheered by the pledge from Finland and support from ruling party leaders in the German parliament, who voiced support for the bailout in a draft paper seen by Reuters.

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