Published November 17, 2014
Europe tried to set up a firewall on Monday between the financial turmoil ravaging Greece and the destinies of Ireland and Portugal, the two other bailed-out eurozone countries, and increased pressure on Athens to pass new austerity measures in exchange for saving it from default.
Eurozone governments agreed to reinforce their bailout funds to boost confidence in their ability to stop the crisis from taking down other countries and to help Ireland and Portugal emerge from their debt holes.
Greece's financial life support from Europe, meanwhile, depends on it taking new deficit-cutting measures.
After days of political chaos, the government in Athens has to survive a confidence vote and then get its austerity plan through parliament. To make sure that happens, eurozone ministers have delayed crucial new loans until after the parliamentary vote.
"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 he 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.
If the Greek parliament approves the austerity measures — worth about €28 billion ($40 billion) on top of an unpopular €50 billion privatization program — then eurozone finance ministers will gather again on July 3 to approve the next, critical €12 billion installment of Greece's bailout loans.
The country's 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.
Beyond that, much more remains to be done, as officials conceded Greece will probably need a second bailout of about the same size as the €110 billion ($160 billion) it got from the eurozone countries and the IMF last year.
Many economists question whether Greece can get out of its crisis without restructuring its €340 billion debt load by making creditors take less than they are owed. That's an option EU officials so far ruled out for fear of the potentially disastrous impact on financial markets.
EU officials acknowledged the political difficulty of meeting the bailout requirements, which are aimed both at forcing Greece to fix its finances and at convincing voters in countries like Germany, who are skeptical of putting up money for others' mistakes, that progress will be made.
With the tentative deal set on the loan payout, the finance ministers also signed off on important changes to their bailout funds, which they hope will reinforce confidence in the eurozone's struggling economies and protect them from the market panic afflicting Greece.
Investors were clearly nervous on Monday, with borrowing rates in Portugal, for example, hitting record highs.
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 will kick in at a time when Ireland and Portugal have to start raising money again by selling long-term 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 keep preferred creditor status for bailouts for countries that have no previous support programs.
The IMF said in a statement that bigger changes to the fund — such as giving it the power to buy bonds of struggling countries on the open market — were necessary. "Failure to undertake decisive action could rapidly spread tensions to the core of the euro area and result in large global spillovers," warned the IMF, which funds about one third of the existing eurozone bailouts.
In talks that lasted into the early hours of Monday morning, the finance ministers also agreed to ask banks and other private creditors to share some of the burden of a second bailout for Greece.
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.