Eurozone faces crunch week in debt crisis

PARIS: Eurozone countries must settle their debt crisis at an emergency summit this week to stop Greece toppling into default and possibly dragging the currency bloc's bigger economies with it.

After finance ministers failed to nail down a new rescue package for Greece last Monday, they saw the stakes rise sharply, with stocks and the euro tumbling and observers warning the crisis could spread across Europe.

Analysts warned a debt default by Greece, one of Europe's smaller economies, could spark financial contagion that would infect Italy, the eurozone's third-biggest economy, and Spain, the fourth-biggest.

"The policymakers' continued dithering appears to be pulling both Spain and Italy further into the crisis," wrote analysts at financial consultancy Capital Economics.

"Either they stop fiddling and take decisive action or they may soon have to start contemplating the unthinkable."

"It is time for Europe to wake up," said Greek Prime Minister George Papandreou in an interview published Sunday in the Greek daily Kathimerini.

EU president Herman Van Rompuy said Thursday's summit would focus on "the financial stability of the euro area as a whole and the future financing of the Greek programme."

The EU and International Monetary Fund bailed out Greece in May 2010 with a package worth 110 billion euros ($160 billion) in exchange for a series of drastic austerity measures to stabilise its public finances.

Greece is still in serious difficulty and needs another bailout valued at around the same amount.

Ireland and Portugal have also had to be bailed out, while Italy and Spain are seen to be at risk due to the strained state of their public finances.

Italy's parliament on Friday passed a 48-billion-euro austerity budget aimed at slashing the public deficit by 2014.

Eurozone leaders are now considering ways to buy up Greek debt to take the short-term pressure off Greece. A key sticking point is what the role of Greek private lenders in this restructuring might be.

Greeks have fought in the streets against Papandreou's austerity measures which cut pensions and salaries. Key EU player Germany is now pushing for Greek banks to help shoulder the burden of a second bailout scheme.

Critics of this plan, including the European Central Bank, warn that if banks are seen to be forced to lend to Greece on more favourable terms, markets would interpret this as an effective default and panic would escalate.

EU officials have also mooted a convoluted plan to lend Greece money with which it can buy back its own debt at a reduced price on secondary bond markets, effectively postponing its repayments to give it breathing space.

This money would come from a special eurozone bailout fund, the European Financial Stability Fund.

Market tension was heightened last week by the release of the results of "stress-tests" on European banks, which diagnosed eight European banks as unstable.

The results appeared better than expected, but critics said the test was not tough enough since it not include the possibility of a sovereign debt default by a country such as Greece.

Meanwhile markets are anxiously watching a row in Washington between US President Barack Obama and his Republican opponents in Congress who reject his plans to raise the country's debt limit to allow more US borrowing.

The government has warned that failure to reach a deal could plunge the world's richest economy into a debt default.

Copyright AFP (Agence France-Presse), 2011