May 8, 2010 / 8:42 AM / 9 years ago

EU works on mechanism to stop Greek contagion

BRUSSELS (Reuters) - 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.

France's President Nicolas Sarkozy (front L) and Germany's Chancellor Angela Merkel (front R) walk together during a Euro Zone leaders summit in Brussels May 7, 2010. REUTERS/Michel Euler/Pool

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 canceled 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 stabilizing the country was vital for both Europe’s and the United States’ economic wellbeing.

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.

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.

“WORST CRISIS”

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

“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 September 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 stabilize 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.

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. 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.

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.”

Slideshow (29 Images)

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.”

Writing by Kevin Liffey and Mark Trevelyan

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