Eurozone struggles with Greece amid default fears

By Sarah Dilorenzo

Associated Press

Published: Monday, Oct. 3 2011 11:10 a.m. MDT

The media focusses on the Greek Finance Minister Evangelos Venizelos, prior to the start of the Eurogroup ministers meeting in Luxembourg, Monday Oct. 3, 2011. The eurozone's financial chiefs faced tough decisions over how to deal with Greece's debt crisis on Monday after Athens' admission that its deficit will be higher than promised sent markets tumbling.

Yves Logghe, Associated Press

LUXEMBOURG — The eurozone's financial chiefs were under pressure to find new ways to relieve Greece's debt crisis on Monday, after Athens acknowledged that its deficit will be higher than it had promised in return for a massive bailout.

Greece's revelation calls into question whether Athens will receive the next installment of a bailout loan it needs to pay its day-to-day bills. If it doesn't receive the €8 billion ($10.8 billion) slice by mid-October, the debt-ridden country will be unable to pay pensions and salaries and eventually go bankrupt.

The admission also casts a shadow over a second, €109 billion bailout tentatively agreed in July, when it became clear that the initial €110 billion rescue package would not be enough.

Germany and several other countries have been pushing to impose larger losses on banks holding Greek bonds as part of the second bailout, since a sharp recession is eating away at Greece's debt reduction efforts.

But countries with banks that have a large exposure to Greece, such as France, have been reluctant to consider such an option.

Amid the disagreements, officials arriving for a meeting in Luxembourg quickly sought to lower expectations.

"We won't take a decision today on the next tranche for Greece today," said Luxembourg Prime Minister Jean-Claude Juncker, who chairs the finance ministers' meetings.

European Monetary Affairs Commissioner Olli Rehn also wouldn't be drawn out on what Greece's rescue creditors will do with the new information out of Athens.

"We are currently assessing whether Greece will meet its fiscal targets with the current measures," Rehn said ahead of Monday's meeting. "I want to do our job first properly."

Greece said Sunday that it will run a deficit of 8.5 percent of economic output, or €18.69 billion ($25.2 billion), this year — far above the promised €17.1 billion ($23.1 billion), which would have been 7.8 percent of GDP.

The news added to investors' fears that even the country's dramatic spending cuts and billions of euros in rescue loans from other eurozone countries and the International Monetary Fund may not be enough to get it back into a position where it can repay its enormous debts. It sent the euro plummeting to near-2011 lows against the dollar.

German Finance Minister Wolfgang Schaeuble — whose country is the eurozone's largest economy and has been very strict on the budget targets — did little to reassure investors, saying that ministers would wait for a report from Greece's debt inspectors before taking any decisions.

That position was not popular with all of his colleagues, especially those from countries that risk being hurt by a Greek default.

"With every day that passes we send negative signals. We lose time, and also a lot of options," said Belgian Finance Minister Didier Reynders. Reynders said he hoped that ministers would decide in the coming days to transfer the money to Greece, citing the country's efforts over the past year.

Shares in Franco-Belgian bank Dexia tumbled 10 percent Monday after ratings agency Moody's warned its may soon downgrade the lender's creditworthiness. Dexia, like several large French banks, has faced market pressure in recent weeks amid worries over its exposure to Greece. Reynders said both France and Belgium were standing behind their banks.

Officials sought to present Monday's meeting as a pit stop in the negotiations toward a broader solution to the eurozone's debt crisis.

Besides Greece, the ministers will also discuss technical options to increase the firepower of their €440 billion bailout fund — the European Financial Stability Facility — without having to raise their financial commitments. Most analysts agree that the EFSF is currently too small to effectively stop the crisis from spreading to large economies like Italy and Spain if market pressures increase.

"We are reviewing options of optimizing the use of the EFSF in order to have more out of it and make it more effective as a firewall to contain contagion," said Rehn.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are due to meet in Berlin on Sunday, a get-together that may help bridge their divisions over the crisis.

Greek Finance Minister Evangelos Venizelos meanwhile insisted that his country was making progress on its debts and promised that it had the ability to pull itself out of its debt hole.

"Greece is a country with structural difficulties, but Greece is not the scapegoat of the eurozone," he said as he headed into Monday's meeting. "We have the possibility and the capability to go ahead despite a deep recession."

Part of the problem is that since Greece's economy is shrinking, the government is taking in less and less money. That in turn means it has to cut even more to reduce the size of its deficit and make a dent in its debts.

In 2012, Athens' debts are projected to reach 172.7 percent of gross domestic product, while the deficit will drop to 6.8 percent.

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