EU finance ministers wrangle over Greek debt (AP)

LUXEMBOURG – The drama over Greece's imploding finances moved Sunday to Luxembourg, where eurozone ministers must approve an immediate loan to keep Greece from defaulting next month but will wrangle fiercely over lending terms for the billions needed in a second massive bailout.

The meeting of the 17 eurozone nations comes after a tumultuous week that saw rioting on the streets of Athens, a Greek Cabinet reshuffle, days of market turmoil that sent borrowing costs spiking and Germany softening its demand on the extent that banks and other private lenders share the risks of any new loans to Greece.

On only his third day in office, Greece's new finance minister, Evangelos Venizelos, faced his first big test Sunday — negotiating the vital second bailout package with Greece's frustrated international creditors.

In Athens, Greek Prime Minister George Papandreou confirmed that talks were under way over the second bailout, which he said was "roughly equal" to the first euro110 billion ($157 billion) rescue the country accepted over a year ago.

The finance ministers can't be happy that their previous estimate for solving Greece's debt problems was so far off-base. And they will press Venizelos on many fronts — to control Greece's budget overruns, to solve setbacks in cost-cutting reforms, and to push ahead with a euro50 billion ($70.5 billion) sell-off of Greek government assets.

The eurozone and the International Monetary Fund have based their approval of new money on Greece passing budget cuts worth some euro28 billion ($40 billion) before the end of the month, as well as starting the unpopular privatization program. Those measures have already sparked angry protests and forced Papandreou to reshuffle his government.

The IMF and Germany, the two single biggest contributors to Greece's existing bailout, have already had to back away from previous demands as panic swelled in markets around the world, giving Europe and Greece more space to sort out their differences.

Venizelos sounded upbeat on the way into the conference center.

"It is a great opportunity for me to repeat the strong commitment of the Greek government and the strong will of the Greek people for the implementation of the program," he said.

The IMF has indicated it will sign off on its portion of the next loan installment even if a new, longer-term bailout program has not yet been finalized. That euro12 billion ($17 billion) must land in Greece's account by mid-July to repay billions of euros in maturing bonds and fend off a default.

However, Belgian Finance Minister Didier Reynders on Sunday raised the possibility of only releasing euro6 billion ($8.6 billion) for the moment. That would cover a first round of bond redemptions in July, but would leave Greece short of money for a new bond repayment deadline in August.

Germany, meanwhile, softened its stance on the second Greek bailout, with Chancellor Angela Merkel saying any private-sector contribution to the second bailout will be voluntary. That won't spark a partial Greek default that would slam Greek and European banks, roil financial markets and affect other debt-challenged nations like Portugal, Ireland or Spain.

The exact role of the private sector in the new bailout will feature prominently in talks that will continue Monday morning. Jean-Claude Juncker, the prime minister of Luxembourg who also chairs the eurozone finance meetings, told reporters not to expect a final deal Sunday night.

Just over a year after its first bailout, Greece is trailing its financial goals. Without passing the new austerity measures, its budget deficit will remain above 10 percent of economic output this year — far from the promised 7.5 percent. The country's debt is expected to reach 160 percent of gross domestic product by the end of 2011, while its economy continues to shrink.

The harsh austerity measures and the bleak outlook for the depressed Greek economy and the resulting street protests are increasingly challenging the survival of Papandreou's government.

Opening a three-day parliamentary debate that will culminate in a confidence vote Tuesday, Papandreou blamed Greece's bloated and inefficient state sector for bringing the country to its knees. He vowed deep changes with a fall referendum on the constitution that would make it easier to get rid of inept officials or workers.

Many experts say Greece's debt load is too great and expect it to eventually default. The European Central Bank, however, has been adamant that a Greek default is unthinkable because it could set off an unpredictable financial chain reaction.

In Germany, skepticism persisted over whether another massive aid package will be sufficient to stabilize Greece, with several lawmakers from Chancellor Angela Merkel's coalition government saying a Greek debt restructuring is all but inevitable.

"We need a haircut on the debt — and that won't happen voluntarily," conservative lawmaker Manfred Kolbe told the German news magazine Der Spiegel.

Germany, as Europe's largest economy, funds much of the bailouts to weaker members, a fact that has angered many ordinary citizens. A poll showed that almost every second German thinks Greece should leave the eurozone and return to its old individual currency.

In the poll published by Focus news magazine, 46 percent said Greece should return to the drachma, but 47 percent of the 1,000 people surveyed by pollster TNS Emnid said Greece should remain in the eurozone. No margin of error was provided for the poll.

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Demetris Nellas in Athens and Juergen Baetz in Berlin and David McHugh contributed to this report.

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Greek PM makes rival finance chief to shore up support (Reuters)

ATHENS/BERLIN (Reuters) – Greek Prime Minister George Papandreou sacrificed his unpopular finance minister on Friday and put his main socialist party rival into the job in a bid to force through an austerity plan to avert bankruptcy.

The appointment, which analysts said was a second-best after Papandreou failed to persuade respected former European Central Bank vice-president Lucas Papademos to come aboard, came just before a crucial Franco-German summit to discuss future aid to Athens.

The elevation of Defense Minister Evangelos Venizelos to the finance ministry was aimed at securing party backing for crucial tax rises, spending cuts and sell-offs of public assets required for the EU and IMF to disburse emergency loans to keep Greece afloat next month and avoid a default which could unleash global financial turmoil.

Outgoing Finance Minister George Papaconstantinou, who negotiated a first 110 billion euro bailout for Athens last year and had the confidence of international lenders and financial markets, was shunted aside to the environment ministry in a crisis-driven reshuffle.

"Venizelos is politically powerful and that might bode well for the implementation of fiscal consolidation, even though he has no track record in financial matters," UBS analyst Alexander Kyrtsis said.

Initial Greek market reaction was positive with bank shares rising by as much as 4 percent and the Athens stock market index up 2 percent.

But bond markets remain spooked by fears of a Greek default and most economists are overwhelmingly skeptical that Greece can ever repay its debt mountain, which has reached 340 billion euros or 150 percent of the country's annual economic output.

Reuters' calculations based on 5-year credit default swap prices from Markit show an 81 percent probability of Greece eventually defaulting on its debt based on a 40 percent recovery rate.

In Berlin, German Chancellor Angela Merkel and French President Nicolas Sarkozy will try to overcome sharp differences on how to involve private investors in the second rescue plan without sparking carnage in financial markets.

A German minister said he expected them to strike a compromise after weeks of wrangling that has rattled markets.

"I believe the meeting today will yield a solution," German Deputy Foreign Minister Werner Hoyer told ZDF television. "I am sure they will come to a compromise."

The European Central Bank and European Commission have warned that any form of private sector involvement that causes a "credit event" or a downgrading of Greek debt to default status could wreak devastating damage on the euro zone.

BOND MARKETS RATTLED

Battered by strikes, protests and a string of resignations in his PASOK party, Papandreou has vowed to drive through his unpopular reform program for the sake of stability in Greece.

The political drama in Athens, where mass street protests turned violent and efforts to form a national unity government collapsed on Wednesday, and the splits in the EU continued to rattle bond markets on Friday.

The yield on 10-year Greek government bonds spiked to a record high of 18.9 percent just before the reshuffle was announced, and the cost of insuring Greek debt against default also hit a new all-time peak.

There were some signs on Thursday of growing tension in interbank lending on money markets, as occurred when the Greek debt crisis erupted early last year.

In the latest warning from the ECB, policymaker Yves Mersch said a "disorderly insolvency" would have devastating effects for the whole currency bloc and "a new financial crisis would be more than likely."

The European Union's top economic official, Olli Rehn, told a Finnish newspaper he was sure the EU and the International Monetary Fund would release a crucial 12 billion euro loan tranche in early July to keep Athens from defaulting.

Rehn acknowledged it would take longer to put together a second rescue package for the heavily indebted state, due to differences over how to involve private investors, but he called for decisions by mid-July rather than leaving the issue until September, as EU paymaster Germany is suggesting.

China weighed in, saying it had a vital interest in the euro zone overcoming its debt woes and had increased its holdings of euro debt, but gave no figures or timeframe.

"Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us," Vice Foreign Minister Fu Ying told a media briefing in Beijing.

Rehn said he expected euro zone finance ministers to take decisions on a successor program for Greece on July 11.

But two sources briefed by the German government said Berlin wanted to postpone agreement on a new 120 billion euro program, including 30 billion in privatization proceeds, until September due to disputes over how to involve private investors.

Backed by the Netherlands and Finland, Germany wants a "voluntary" debt swap in which bondholders would be given new bonds with a seven-year maturity, but credit rating agencies have warned they would treat that as a selective default.

That could prompt the ECB to refuse to accept Greek bonds as collateral, depriving Greek banks of vital liquidity on which it is totally dependent.

The European Commission, the ECB and France favor a softer form of private sector involvement under which banks would agree to roll over Greek bonds as they mature and are redeemed.

Fitch Ratings appeared to open the door to a possible compromise on Wednesday by saying that while it would treat such a rollover as a "restrictive default," it would keep Greek bonds rated at CCC.

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