Belgium adds to call for euro bonds, bigger bailout (Reuters)

VIENNA/BRUSSELS (Reuters) – Pressure on Germany and France to take radical action on the euro zone debt crisis mounted on Friday, as financial markets sagged further and Belgium added its support to calls for the region to issue debt jointly.

Belgian Finance Minister Didier Reynders said the bloc should issue common euro bonds and expand its bailout fund to calm repeated market selloffs of government bonds and bank shares of vulnerable debtor countries.

Germany has led resistance to both proposals. Belgium's support for bonds promoted by high-debt nations such as Italy and backed by some European Commission officials will not necessarily tip the balance.

But Reynders' call in the Financial Times for the euro zone had to prove it had "deep pockets" underlined increasing fears among euro zone governments that they would be unable to reassure investors that euro zone banks are safe without drastic action by the 17-nation bloc.

Merkel repeated her criticism of proposals for euro zone bonds, telling a rally of her Christian Democrats this was a "slippery slope" that would probably leave everyone worse off.

"Euro bonds would not allow any rights at all to intervene to force discipline on others," she said.

French Prime Minister backed her view, writing in an editorial published in daily Le Figaro that common euro zone bonds without further fiscal consolidation could threaten France's triple-A credit rating.

Bickering over the latest Greek bailout and lingering disappointment over Wednesday's Franco-German summit helped drag European shares to near two-year lows on Friday.

Fears that major world economies are heading for recession are adding to worries that euro zone banks face short-term funding troubles, losses from sovereign debt and weak trading income.

Greece, at the center of the euro zone debt storm, also announced its economy would shrink by more than previously thought -- by 4.5 percent this year against an earlier estimate of 3.8 to 3.9 percent.

"The best way to resolve a debt crisis is to grow out of it so a recession certainly would not help. I think the confidence element is very important now," said ING economist Martin van Vliet. "It's time to break the downward spiral of a self-fulfilling recession. We are in that stage right now."

Spain's announcement of further austerity measures and a move to support its stricken housing market, aimed at showing it was working hard to stay out of the debt crisis, had little market impact.

BAILOUT SQUABBLE

Market impatience with the pace and complications of euro decision-making has been heightened by a rush by smaller euro economies to demand collateral from Greece in return for contributing to its bailout fund, and Austria sought on Friday to resolve that dispute.

The collateral demand, first made by Finland, has ruptured the common line found at the July 21 summit, particularly after Austria, the Netherlands and Slovakia said on Thursday they deserved the same treatment.

Dutch finance minister Jan Kees de Jager described as "very complicated" Austria's proposal that more collateral should be available to countries whose banks and insurers were less exposed to Greece.

Marco Valli, chief eurozone economist at UniCredit, said that Europe needed more than ever to be speaking with one voice.

"If you want to sell your pact to save Greece then you should not be fighting about this. It undermines the credibility of the package," he said.

For markets though, the issue of collateral may be more of a sideshow compared with the debate on additional support for the zone.

Germany, the euro zone's chief paymaster, has repeatedly opposed a big increase in the bailout fund and says that common euro zone bonds would remove incentives for fiscal prudence, rewarding profligate nations.

European Central Bank heavyweight Juergen Stark described jointly issued bonds on Friday as a "false solution."

Even so, BNP Paribas Chief Eurozone Market Economist Ken Wattret said he believed euro zone leaders would ultimately agree to launch common bonds and to increase the bailout fund.

"It would be helpful for markets if the EFSF were increased now, but the political reality is that this is unlikely to happen until at least later in the year," he said.

(Additional reporting by Sara Webb in Amsterdam, Stephen Mangan in London, Petra Wischgoll in Hameln, Germany, Marc Angrand, Nicholas Vinocur in Paris)

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Europe nears agreement on Greek crisis bailout (AP)

BRUSSELS – Greece would get some relief on part its massive debts and a Europe-wide rescue fund would gain new powers to swiftly aid other debt-stricken countries under a sweeping deal being negotiated by eurozone leaders Thursday.

Though the deal would likely trigger a temporary default by Greece — the first ever by a euro state — it could also help the ailing country emerge from its debt hole in the longer term and shake up Europe's way of handling the crisis, by making it more proactive.

Stocks, bonds and the euro rallied sharply on hopes that the deal will be a turning point in the eurozone's 18-month debt crisis. Growing market panic has weighed on the single currency and forced already bailed out Greece, Portugal and Ireland as well as struggling Spain and Italy to make billions of euros in cuts.

A draft of the deal seen by The Associated Press said that banks and other private investors that own Greek bonds have agreed to contribute to the rescue of the country — language indicating that they will accept being paid back more slowly or at lower interest rates.

This could happen through banks trading their current bonds to Greece for new ones that mature years later. The banks could also sell their bonds back to Greece at a loss.

Ratings agencies have long warned that such measures would be seen as a form of Greek default on its loans, a first for a eurozone country and a potential cause of devastating loss of confidence in the other heavily indebted nations.

Markets appeared to be seeing the draft measures as less harmful than expected, however, fueling the rally.

"Greece is in a uniquely grave situation. This is the reason why it requires an exceptional solution," the draft says.

The draft deal, if approved, would also radically overhaul a bailout fund created last year after Greece was bailed out with euro110 billion ($156 billion) in rescue loans by the other eurozone countries and the International Monetary Fund. Like Greece, Ireland and Portugal have since found themselves increasingly unable to sell bonds with sharply higher rates demanded by investors frightened that their struggling economies would leave them unable to repay their debts.

But so far the European Financial Stability Facility could only be tapped once a country was on the brink of financial collapse and after it agreed to huge cuts and changes to the way its economy is run.

The deal would now allow the EFSF to intervene pre-emptively, before a country is in full-blown crisis mode.

For instance, countries could be given a "precautionary program," likely some form of credit line. That might allow states under stress, like Spain, to continue raising money on the markets, giving an extra assurance to investors, and could also make it easier for Ireland and Portugal to re-enter the markets once their bailout programs expire.

Money from the EFSF could also be used in some situations to recapitalize banks in countries that have not yet been bailed out, the draft says.

On top of that, the draft says, the EFSF could be authorized to buy up bonds of troubled countries on the open market, maintaining the prices of the bonds and keeping their interest rates from skyrocketing in the face of pressure from worried investors.

A eurozone official told The Associated Press that the draft was "definitely not final" and that "anything can change," speaking on condition of anonymity because of the sensitivity of the negotiations.

Even though initial market reaction to the draft deal was positive, the euro traded up 0.8 percent at $1.4371 after it had slumped earlier in the day, analysts warned that it won't constitute a turning point in the eurozone's debt travails.

"From what we can see, there are still couple of major shortcomings," Jonathan Loynes, chief European economist at Capital Economics in London, said in a note. The deal would reduce Greece's near-term financing needs, but won't significantly lower the overall debt burden, Loynes said, adding that "there is no 'shock and awe'," that would boost market confidence in the eurozone as a whole.

A major fear about a potential Greek bond default has been the potential for massive disruption to the Greek banking system. Greek banks use Greek government bonds that they own as collateral for short-term loans they receive from the European Central Bank.

That money funds the banks' day-to-day operations, including short-term loans to private businesses.

A default would render the bonds useless as collateral, causing that funding to dry up and wreaking havoc on the Greek economy.

To prevent that, the eurozone could provide some form of repayment guarantee or collateral for the new Greek bonds banks would take on, the draft says.

According to the draft, the eurozone and the International Monetary Fund are also ready to give new rescue loans to Greece, without providing a number.

Eurozone leaders also plan to ease the loan conditions for their part of the bailout, by doubling the average loan maturity for Greece to at least 15 years from 7 1/2 years currently and reduce the interest rate to 3.5 percent.

Those softer loan conditions would also apply to Ireland and Portugal.

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Moody's cuts Portugal to junk, warns on 2nd bailout (Reuters)

LISBON/NEW YORK (Reuters) – Moody's on Tuesday cut Portugal's credit standing to junk in the first such move by a ratings agency and warned the country may well need a second round of rescue funds before it can return to capital markets.

Moody's Investors Service slashed Portugal's credit rating by four levels, to Ba2, causing the debt-laden Iberian country to follow Greece into junk territory below investment grade. Greece is rated much lower, at Caa1.

Portugal in April became the third euro zone country to request a bailout, after Greece and Ireland.

Moody's cited heightened concerns that Portugal will not be able to fully achieve the deficit reduction and debt stabilization targets set out in its loan agreement with the European Union and International Monetary Fund.

Portugal is receiving funds from a three-year, 78-billion-euro ($112 billion) EU/IMF bailout program and does not need to issue long-term debt in the market until 2013.

But Moody's said there is an increasing probability Portugal will not be able to borrow at sustainable rates in capital markets in the second half of 2013 and for some time thereafter.

There was a "growing risk that Portugal will require a second round of official financing before it can return to the private market, Moody's said, and the increasing possibility that private sector creditor participation will be required as a pre-condition."

It also said Portugal faced formidable challenges in reducing spending, increasing tax compliance, achieving economic growth and supporting the banking system.

Of the three major ratings agencies, Standard & Poor's and Fitch Ratings both have Portugal at BBB-minus, the bottom of the investment grade range.

Portugal's new center-right government said in a statement that Moody's did not take into account strong political backing for austerity after a June 5 election, and an extraordinary tax announced last week.

Unlike the previous minority Socialist government, the new ruling coalition has a comfortable majority in parliament to pass austerity measures and reforms. It did acknowledge, though, that the rating cut "shows the vulnerability of the country's economy amid a debt crisis."

It also reaffirmed commitment to deepening and speeding up austerity measures that the country vowed to implement under its bailout pact, saying a strong macroeconomic adjustment was "the only way to reverse the course and restore confidence."

The country has to slash its budget deficit to 5.9 percent of gross domestic product this year after overshooting its target last year, when the gap was 9.2 percent, and then reduce it to 3 percent by the end of 2013.

Anthony Thomas, Moody's analyst for Portugal, told Reuters "evidence that Portugal is meeting or indeed exceeding its deficit reduction targets" could be a positive that may lead the agency to change its outlook on the country's credit rating to stable from negative.

But he also said the outlook depends a great deal on whether euro zone officials will require private sector participation when extending new financing to the region's troubled countries. Right now, such participation is planned to be only voluntary so as not to cause ratings agencies declaring it a "credit event."

Filipe Garcia, head of Informacao de Mercados Financeiros consultants in Porto, said Moody's move was "a bit extreme" and was likely to exacerbate concerns over Portugal's debt.

"The capacity to return to the markets after a while depends on a more global, structural solution by Europe rather than on what each troubled country does. I think it's too early to think of a second bailout for Portugal right now, not this year at least," he said.

Garcia said the ratings agencies were not taking into account the European Union's political determination to avoid a euro zone member's default, despite the union's strong support for Greece, which is in a far worse shape than Portugal.

"Either they don't believe in the power of the political will by the European Union to avoid default, or they are underestimating this political union," he said.

Robert Tipp, chief investment strategist at Prudential Fixed Income in New Jersey, said the downgrade showed the European debt crisis was unlikely to stop at Greece, which looks set to receive a second bailout.

"Once Greece gets wrapped up, you move on to the next country, and in all likelihood that will be the shape of things to come over the next year or two in the euro zone until the long-term financing trajectory for these countries gets stabilized," he said.

In practical terms, Portugal may have to pay a higher premium to place up to 1 billion euros in 3-month Treasury bills in an auction on Wednesday due to the downgrade.

"It'll probably make the yield a bit worse, but I don't expect anything major, because when you go to the market now you have to have the issue booked in advance," Garcia said. Portugal has opted to stay in the T-bill market after the bailout.

(Additional reporting by Daniel Bases in New York and Sergio Goncalves in Lisbon; Editing by Dan Grebler)

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Greece clears final hurdle to get bailout funds (AP)

By ELENA BECATOROS and DEMETRIS NELLAS, Associated Press Elena Becatoros And Demetris Nellas, Associated Press – 1?hr?54?mins?ago

ATHENS, Greece – Greece bought itself time to deal with its crippling debt crisis Thursday after lawmakers passed the second and final austerity bill essential for the release of crucial bailout funds that will prevent the country from defaulting next month.

The European Union and International Monetary Fund had demanded Parliament pass two bills — an austerity law and a second bill detailing how it will be implemented — by June 30 before they approve a euro12 billion ($17.3 billion) installment from the country's euro110 billion ($159 billion) package of rescue loans.

Without the next installment of rescue loans, Greece was to run out of money in mid-July.

Despite that overhanging threat, many Greeks were angry at yet more austerity. A 48-hour general strike and outbreaks of violence on the streets of Athens brought much of Greece to a standstill in the run up to Wednesday's vote on euro28 billion ($40.5 billion) worth of spending cuts and tax hikes and a euro50 billion ($72 billion) sell-off of state enterprises.

Fears of a Greek default have weighed heavy on global markets in recent weeks — investors have been fretting that a default could trigger a major banking crisis and turmoil in global markets, similar to what happened when the Lehman Brothers investment house collapsed in 2008 in the United States.

Concerns of a near-term default have been eased as the money will see Greece through September. That's clearly evident in the performance of global markets in the past couple of days. Athens' main stock market closed another 1.1 percent higher Thursday.

"Greece has bought more time," said economist Vagelis Agapitos. "This time however will start running out rather quickly unless Greece starts to deliver on its promises."

The worst case scenario is that Greece may only have a couple of months to show it is doing so — in September, it will once again have to prove it has implemented all it has promised in order to receive any further funds from last year's bailout package.

One particular point of interest will be what progress it is making on the privatization drive in light of continued union opposition. Few state enterprises are immune from being sold off, from the race track and ports to the state electricity company.

Even if Greece gets through the next hurdle in September, there are still real worries that the country will end up eventually having to restructure its debts — negotiating longer repayment times or giving creditors less than the full amount owed. Many economists believe Greece will ultimately have to default on its debts at some point as the scale of the debt at euro340 billion is just too big for a country of only 11 million people to service.

For now though, the Greek government has conceded it is going to need more help and is in talks for a second bailout. Last year's package was predicated on Greece being able to tap bond market investors for cash next year, but with the country's interest rates at exorbitant levels, that looks highly unlikely.

As well as rubber-stamping the release of the next batch of bailout funds, finance ministers from the eurozone are expected to discuss the terms of a second bailout at their meeting Sunday in Brussels. The IMF is also expected to clear the immediate funds next week.

The involvement of the private sector in any second bailout is likely to feature heavily at the Brussels discussions after German banks agreed to rollover some of the debts Greece owes them. The news that the German banks are willing to contribute to a second rescue package follows on the heels of a similar announcement earlier this week from their French counterparts. Details of the initiatives remain sketchy.

"Of course we have major difficulties ahead of us," Finance Minister Evangelos Venizelos said in the debate before Thursday's vote. "It is not just that we must negotiate with the EU, the eurozone countries, our institutional partners and the IMF. The point is that in the turbulence of the of the global markets and banking system, we are victims for a large part and a test case for the strength of our institutions."

Parliament passed the second law by 155 votes to 136 Thursday, a day after voting through the main austerity bill in a vote held as rioters clashed with police outside parliament in a second day of violence.

More than 300 people were injured in two days of mayhem in central Athens, which saw rioters pelting police with anything they could find, and police responding with a barrage of stun grenades and tear gas that still lingered in the city's central square on Thursday morning. Windows at cafes and shops were smashed, and a post office housed on the ground floor of the finance ministry building torched. Burning barricades set up across central streets smoldered into the early hours of Thursday.

The austerity measures, which slap taxes even on the lowest paid, have sparked repeated strikes and demonstrations. The riots on Tuesday and Wednesday came during a 48-hour general strike that disrupted services across the country, forcing airlines to cancel or reschedule flights, halting nearly all public transport and leaving ferries tied up in port.

The EU welcomed Thursday's vote, with the heads of the EU commission and council, Jose Manuel Barroso and Herman Van Rompuy saying it was a "decisive step Greece needed to take in order to return to a sustainable path. In very difficult circumstances, it was another act of national responsibility."

____

Derek Gatopoulos in Athens contributed.

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Banks move closer to deal on Greek bailout (Reuters)

ATHENS/FRANKFURT (Reuters) – Banks and policymakers moved closer to a deal on Friday to help Athens secure funds ahead of a parliamentary vote on austerity next week that Greek Prime Minister George Papandreou must win to avert default.

Despite a refusal by the conservative opposition to back the plan agreed with international lenders and signs of revolt in his own socialist party, Papandreou said he was confident the deeply unpopular package of spending cuts, tax hikes and privatizations would pass.

"It is a moment of historic importance. If everybody resists, worse things will come, perhaps even bankruptcy," Papandreou told a news conference at the sidelines of a summit of European Union leaders in Brussels.

The meeting saw euro zone governments discuss a new bailout package for Greece, which could include up to 30 billion euros from the private sector to help cut Greece's huge public debt.

President Nicolas Sarkozy said French banks had agreed to participate in a voluntary rollover of Greek debt, Spain's Jose Luis Rodriguez Zapatero said Spanish banks were willing to take part in a scheme to buy Athens more time while Berlin has asked German banks to state their intentions next week.

"We have had many meetings with the banks and insurance companies. There is no difficulty," French President Nicolas Sarkozy told reporters after the meeting.

However, no new money will flow unless the Greek government enacts deep cuts and markets remain skeptical. The euro fell sharply on doubts the government will win the day after a maverick ruling party member said he would vote against.

"It's very ugly; a complete mess," said a trader in London. "There's a rumor the austerity won't pass."

After a difficult series of meetings this week, new Greek Finance Minister Evangelos Venizelos thrashed out an agreement with inspectors from the EU and the International Monetary Fund on Thursday to release the funds Greece needs immediately.

But if the vote next week is lost, international lenders are unlikely to release a 12 billion euros funding tranche, meaning the government will run out of cash within days.

Greece accepted a package of 110 billion euros of EU/IMF loans in May 2010 but now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.

International lenders want binding commitments that Athens will push through the painful measures judged necessary to get its shattered public finances back in order.

The government won a vote of confidence this week with 155 out of 300 votes in parliament, showing how tight the June 29 vote on its austerity package could be.

In a sign of the uncertainty around the vote, which will be accompanied by a two-day general strike, one deputy from the ruling PASOK party said he will oppose the mix of higher taxes, spending cuts and state selloffs.

"Shops are shutting down every day and we are taking anti-growth measures," party maverick Thomas Robopoulos, a car dealer from Greece's second city, Thessaloniki, and one of the few businessmen in parliament told Reuters. "I will take the floor in parliament and try to convince them to do something."

Daily protests continue in Athens and other cities and an opinion poll on Friday put Greece's conservative opposition 2.1 points ahead of PASOK and showed three quarters of Greeks oppose the raft of tax hikes and spending cuts that will hit them hard.

Greece's partners have expressed growing impatience with what they see as a refusal to face the seriousness of the situation. The attitude of the conservative opposition, which has said it will oppose parts of the package, has particularly enraged European leaders.

"I made it very clear that for the acceptance and for the stability of Greece, it would be highly desirable for the opposition to vote for this package," German Chancellor Angela Merkel said in Brussels.

GETTING BANKS ON BOARD

As well as reform commitments by Greece, private sector involvement in a new rescue is seen by many governments as a vital element to meet objections that European taxpayers were left to foot the bill for saving bank balance sheets.

But it has been complicated by the fact that any scheme must be voluntary, otherwise it risks being classified by credit ratings agencies as a default, or at least a "credit event," which could have serious repercussions for financial markets.

Banking sources told Reuters that European banks and finance officials were discussing a proposal to replace existing Greek debt with a different type of bond to get around ratings agencies' reservations.

The proposal is for a voluntary rollover of debt into securities of a different and not comparable credit composition to avoid agencies moving Greece to default status.

"I don't want to comment on the current state of these talks, I think it's most important for us to have these talks first and then report to you the results," Merkel said. "I don't think it would be wise to give you any numbers. We don't have any hard numbers as of yet.

At the EU summit in Brussels, Papandreou promised to push through radical economic reform after Venizelos clinched agreement with EU and IMF inspectors on extra tax rises and spending cuts to plug a 3.8 billion euro funding gap within an agreed five-year austerity plan worth 28.4 billion euros.

On Thursday, Venizelos announced additional measures including extra spending cuts, lowering the minimum income tax threshold and imposing a special "solidarity levy," measures that will hit ordinary Greeks yet harder.

Employees at Greece's dominant electricity producer PPC, which is slated for privatization next year, were on rolling 48-hour strikes for a fifth day on Friday. The union opposes plans to sell a 17 percent stake in the firm and said the labor action will lead to power cuts.

"Many thought the change of guard at the finance ministry would have helped the weak income groups and those who consistently pay their taxes," said Ethnos, a center-left daily that is normally supportive of the government. "Unfortunately, these hopes were dashed."

(Additional reporting by Emmanuel Jarry, Julien Toyer, Fiona Ortiz, Alex Chambers and Philipp Halstrick, writing by James Mackenziez)

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