Crunch week kicks off for Greece

LUXEMBOURG – A crunch week for Greece kicks off Sunday with European Union backers set to release summer cash flow to save Athens from early default, before shaping second major bailout to appease nervous markets.

Eurozone finance ministers gather in Luxembourg from 7:00 pm (1700 GMT), including Greece’s Evangelos Venizelos, the former defence minister parachuted in on Friday to manage the crisis for a reshuffled government facing a vote of confidence over its tough austerity plans.

Greece’s 16 euro currency partners are expected to grant their 8.7-billion-euro share of a 12-billion-euro tranche of bailout funding for the stricken economy.

A further 3.3-billion-euro portion from the IMF should follow once an outline deal on financing through to the end of 2014 is agreed.

These will be the fifth tranche of pay outs from a 110-billion-euro ($156 billion) EU-IMF loan package agreed last year.

Over talks running through Monday with the other 10 EU states, the real work for the European finance ministers revolves around sharing the burden of a new, lasting rescue package between taxpayers and the private sector.

“In my view there are two red lines that should be entirely respected: it should not trigger credit events nor credit default,” said European Union president Herman Van Rompuy, with an eye on a full summit of leaders in Brussels on Thursday and Friday.

Some such as Britain have vowed to resist being sucked into contributing as with previous bailouts for Ireland and Portugal.

The idea is to come up with a second loan package of around 100 billion euros.

This time, it will be a combination of more loans from European partners and the IMF, plus a crucial contribution from the banks, as well as proceeds from Greek privatisations and other reforms ranging from deeper austerity cuts to tax rises.

The demands for more Greek action on its deficit lie behind a wave of protests verging on civil unrest in Athens.

The protesters have created renewed political urgency for Prime Minister George Papandreou, who will arrive in Brussels for pre-summit lobbying on Monday.

With 350 billion euros of debts, meaning massive interest payments and redemption bottlenecks to service or re-negotiate, the threat is that Greece may have no option but to default if it cannot finance its government commitments.

And even if banks agree to wait years to get their investments back by ‘rolling over’ existing bonds, the worry is still that the credit rating agencies who drive up the cost of borrowing will view the arrangements as a de facto partial default.

German and French savers hold the biggest amounts of Greek debt, but leaders worry that further markdowns would spread to other vulnerable or bigger euro zone economies such as Belgium or Italy and lead to capital flight undermining the entire currency area.

After Moody’s Investors Service warned of risks to the sovereign rating of Italy, Luxembourg Prime Minister Jean-Claude Juncker, who chairs the Euro group of finance ministers from the shared currency area, said: “We are playing with fire.”

The European Commission has been negotiating with the big international rating agencies — previously announced as the target for new restrictive regulation across the single EU market given their influence in hastening the three existing euro zone bailouts.

The European Central Bank, backed by France, sees dangers in twisting banks’ arms into anything more coercive than a “voluntary” rollover, and German Chancellor Angela Merkel conceded on Friday that the euro guardian must be satisfied with the contours of the deal.

In line with demands from other blue-chip economies such as Finland and the Netherlands, similarly keen to reassure taxpayers unwilling to pay for excesses elsewhere, Merkel still needs to win political support from her governing coalition.

“We must be sure to try to have a substantial contribution” from private creditors, Merkel told her Christian Democrat Union party after backing down on earlier hardline demands at talks on Friday with French President Nicolas Sarkozy.

Berlin now says it will support a deal along the lines of one done to keep the Romanian banking system afloat in 2009.