LUXEMBOURG — Europe sought Monday to put a firewall between the financial turmoil ravaging Greece and the destinies of Ireland and Portugal, the two other eurozone countries that have already received international aid.
The region's finance ministers signed off on important changes to their bailout funds, which they hope will reinforce confidence in the eurozone's struggling economies even though Greece's crisis is at a new boiling point.
As Greece risked defaulting on its debt next month, market pressure was increasing on countries like Portugal, where borrowing rates hit record highs on Monday.
"Times are difficult, the reform fatigue is visible in the streets of Athens, Madrid and elsewhere, and so is the support fatigue in some of our member states," said Olli Rehn, the European Union's Monetary Affairs Commissioner.
But Rehn urged countries to press on with the austerity. "We are about to complete a decisive response to the worst crisis since the Second World War," he added.
To boost market confidence, ministers agreed to raise their guarantees for bailout loans from the current rescue fund to €780 billion($1.1 trillion) from €440 billion, said Klaus Regling, who manages the Luxembourg-based fund. That will allow the fund to lend out a total of €440 billion, up from about €250 billion currently.
The European Financial Stability Facility, as the fund is known, requires significant over-guarantees to get a good credit rating and raise cash.
The increase had been agreed in principle in March, but putting it into force required states to almost double their commitments to the fund — an unpopular move at a time when citizens in rich countries are increasingly frustrated with the cost of helping their weaker neighbors.
On top of that, the ministers also made an important change to their future rescue fund, which they hope will help already bailed-out countries regain access to debt markets.
The so-called European Stability Mechanism, which will come into force in mid-2013, when the EFSF expires, will not have preferred creditor status when it helps countries that have already been bailed out, said Jean-Claude Juncker, the Luxembourg prime minister who also chairs the meetings of eurozone finance ministers.
That means the fund would not be repaid before any private creditors. Giving the fund preferred creditor status had been criticized for discouraging private investors, who would be last in line to be repaid in the case of a default.
The ESM kicks in at a time when Ireland and Portugal have to re-enter international debt markets and start raising some money again by selling bonds. However, investors will be reluctant to buy these bonds if they have a high risk of not being repaid if the economic situation in the two countries worsens again.
The ESM will retain preferred creditor status for bailouts for countries that have no previous support programs.
The International Monetary Fund said in a statement that further changes to the fund — such as giving it the power to buy bonds of struggling countries on the open market — were necessary and that "failure to undertake decisive action could rapidly spread tensions to the core of the euro area and result in large global spillovers."
The warning came a day after eurozone finance ministers had delayed decisions on vital new loan money for Greece to heighten pressure on the country to pass more spending cuts and economic reforms.
Greece will have to wait until an extraordinary finance ministers meeting on July 3 to get the eurozone to sign off on a €12 billion loan installment without which it would default on its massive debts by the middle of the month.
By then, the Greek parliament will have to pass austerity measures worth some €28 billion as well as an unpopular €50 billion privatization program. Its European creditors and the International Monetary Fund are also pushing for the main opposition party to support the measures, which have already sparked violent street protests and forced Prime Minister George Papandreou to reshuffle his Cabinet.
"The greatest weight of responsibility lies on the shoulders of the new Greek government" as well as the other main political forces in the country, said Rehn.
In talks that lasted into the early hours of Monday morning, the finance ministers also agreed to asks banks and other private creditors to share some of the burden of a second bailout for Greece, likely to be similar in size to the €110 billion it was already granted a year ago. However, the ministers stressed that any private-sector involvement would have to be strictly voluntary and could not be considered a partial default by rating agencies.
Greece's newly appointed finance minister Evangelos Venizelos said the eurozone's decisions showed that urgent action was necessary in Athens. "We have plenty to do, on a daily basis," he said in a statement. "The political time has been compressed a lot; each day is of extreme importance and hence we cannot afford to waste a single hour."