EU mulls mechanism to check Greek contagion

The leaders of 16 countries that use the single currency said after talks with European Central Bank and the executive European Commission 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 II 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.

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 per cent of GDP instead of 8.3 per cent, 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.

Domino effect

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 US 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.

The  Finnish Prime Minister further 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 soon.”

Two mechanisms

“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,” 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,” they added.

Greece may rejig EU-IMF deal if austerity works

An unpopular austerity deal with the EU and the IMF to grant Greece billions of euros in badly needed loans could be modified if the belt-tightening bears early results, finance minister said on Sunday, reports AFP from Athens.

“If we succeed and early results are positive, we will be able to return to a negotiation table...(and) save certain things,” Finance Minister George Papaconstantinou told To Vima daily in an interview.

“If the programme works and we reduce the deficit faster than is required of us, we can ask to negotiate differently. Not so much on indirect taxes, but regarding some corrective steps on income,” Greece finance minister George Papaconstantinou said.

As the government was set to finalise tomorrow the latest element of its crisis package — a controversial pension reform — and European finance ministers prepared to discuss a crisis fund for indebted eurozone countries, a poll showed Greeks grudgingly accept the necessity of harsh austerity cuts.