Europe faces D-Day over Greek debt crisis talks

Published on Wednesday 20 July 2011 17:57

A SOLUTION must be found to Greece's debt crisis by the end of today – or there will be significant consequences for the global economy, the head of the European Commission has warned.

In a stark warning to financial leaders, Jose Manuel Barroso said that a special summit, due to be held in Brussels today, needed to take major steps towards stabilising the Greek economy – or risk a knock-on effect across the rest of the eurozone.

"Nobody should be under any illusion: the situation is very serious," said Mr Barroso. "It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond."

He said the elements of a solution must include measures to ensure the sustainability of Greek public finances, private sector involvement in funding for Athens, more flexible use of the eurozone's European Financial Stability Facility bail-out fund, repair of the region's banking system and liquidity to keep the economy going. Finance officials of the 17-nation currency area have long been battling to pin down a package of measures to persuade markets that Greece can be saved.

Some EU member states, including Germany and the Netherlands, are strongly in favour of private sector involvement to solve the crisis, while a second bail-out of up to €120 billion (106bn) is widely expected.

In what hinted at a veiled criticism of German chancellor Angela Merkel, Europe's reluctant paymaster, Mr Barroso warned that the summit marked a time for leaders to say "what they can do and what they want to do. Not what they can't do and won't do".

Ms Merkel earlier this week lowered expectations that much progress would be made, saying the summit would not bring anything as "spectacular" as a solution to the Greek crisis - but argued it was only the latest in a series of incremental steps to tackle the roots of Athens' debt and competitiveness problems.

Ms Merkel and French president Nicolas Sarkozy, who spoke on the telephone on Tuesday, were to meet in Berlin last night for what could be the decisive preparatory session before an early morning session to be held today by eurozone officials to thrash out details hours before the summit.

"We are very confident that there will be a good and sensible solution," Ms Merkel's spokesman said, stressing that private sector creditors' participation remained a key German priority. French finance minister Francois Baroin told French radio that "there should be a strong message, from the highest level".

However, Paris is believed to be frustrated at Berlin's continued opposition to common eurozone bonds - a step European socialist leaders and economists argue would provide a long-term solution to the debt crisis.

The Greek government is hoping the expected bail-out will be announced. It is thought half of the money would come from the eurozone and the IMF, a quarter from private sector involvement and the rest from Greece's ambitious privatisation programme.

"Tomorrow's summit will determine the future of the country and of Europe," government spokesman Elias Mossialos said last night.

Greece's 14-month old austerity programme, combining pension and public wage cuts with tax and retirement age increases, has sparked a wave of discontent around the country.

At times it has turned violent, most notably earlier this month when politicians backed another austerity package required by international creditors for the country to get the next batch of its current bail-out funds. European leaders have faced criticism for their slow, piecemeal efforts to stem the debt crisis.The IMF urged European leaders to act more boldly, warning that there is "no consistent roadmap ahead" and that this could produce "possible significant regional and global spillovers".

It accused governments of "retrenchment, threatening to turn back the clock on economic and financial integration".

"Market participants remain unconvinced that a sustainable solution is at hand," the report said. "Limiting any further damage is now crucial."

Analysts argued that whatever package is offered to Greece could create a knock-on effect on other struggling countries.

Stuart Thomson, chief economist at Ignis Asset Management, said: "We believe that, even in the event of a resolution to the Greek crisis, the focus would shift to additional packages and debt relief for the next two candidates - Ireland and Portugal."

Irish Taoiseach Enda Kenny also predicted the summit would not find a solution to the current crisis.

"What I'd like to think might happen is that the eurozone leaders will make a series of decisions here that will start to restore confidence in the markets in a number of countries," he said.