EU to debate ‘stabilisation fund’

Woman holds a euro coin in front of the symbol of the euro (file)

EU finance ministers are set to meet in Brussels to discuss establishing a new "stabilisation mechanism" to prevent the Greek debt crisis from spreading.

The mechanism, which is being compared to a European-style IMF, would be available to the 16 member states in the eurozone.

Some leaders want details agreed before markets open on Monday, to prevent investor fears over the euro spreading.

But other countries, including the UK, oppose such large-scale support.

On Friday, the leaders of the 16 countries that use the single currency approved an 110bn euro ($145bn; £95bn) loan package to Greece, which is backed by the EU and IMF.

They also agreed to take whatever steps were needed to protect the euro, and to accelerate budget cuts and ensure deficits were addressed.

Correspondents say they are looking to agree on funding of about 70bn euros that could be made available immediately to countries in trouble.

While bail-outs are banned under EU rules, the commission reportedly plans to extend an existing clause in the Lisbon Treaty originally designed to allow it to provide aid to member states experiencing serious difficulties that was used to help Hungary and Latvia.

‘Watertight defence’

But the Commission is also seeking approval for a much more ambitious mechanism that could be used to fund hundreds of billions of dollars of loans.

The BBC’s Jonny Dymond in Brussels says officials at the European Commission have laboured throughout the weekend to rush through these plans.

Under the proposals, the Commission would borrow money for the stabilisation mechanism directly on the markets to gurantee troubled country’s debts.

Officials hope the loan guarantees would prevent the crisis in Greece spreading to other eurozone countries with high deficits or debts as well as low economic growth, most notably Portugal, Spain and Ireland.

"Between now and Sunday night we will have a watertight line of defence," Eurogroup Chairman Jean-Claude Juncker said on Saturday.

"We have to make it clear that all eurozone countries are ready to defend each and every eurozone country, because they want to defend the eurozone as a whole," he added.

Our correspondent says political acceptance from EU nations is critical.

The UK may be happy with the 70bn euro emergency package, it is not prepared to be part of any EU-style IMF guaranteeing loans.

What went wrong in Greece?

Greece’s economic reforms that led to it abandoning the drachma as its currency in favour of the euro in 2002 made it easier for the country to borrow money.

Greece went on a debt-funded spending spree, including high-profile projects such as the 2004 Athens Olympics, which went well over budget.

It was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.

Greece’s economic problems meant lenders started charging higher interest rates to lend it money and widespread tax evasion also hit the government’s coffers.

There have been demonstrations against the government’s austerity measures to deal with its 300bn euro (£267bn) debt, such as cuts to public sector pay.

Now the government is having to access a 110bn euro (£95bn; $146.2bn) bail-out package from the European Union and International Monetary Fund.

Greece’s problems have made investors nervous, which has made it more expensive for other European countries such as Portugal to borrow money.

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Deciding the contribution of each country to the stabilisation mechanism could also be a stumbling block.

Fears that a debt default by Greece could paralyse the world’s financial system – just as the collapse of Lehman Brothers did two years ago – caused European, US and Asian stock markets to plunge in the past week.

On Friday, bankers urged the European Central Bank to become the "buyer of last resort" of eurozone government bonds to steady markets.

The president of the European Central Bank, Jean-Claude Trichet, said it had not yet discussed the move but was willing to respond to unfolding events.

The Italian Prime Minister, Silvio Berlusconi, and French President Nicolas Sarkozy have cancelled foreign trips because of the severity of the crisis.

In an interview with Russian media on Saturday, US President Barack Obama said: "I am very concerned about what’s happening in Europe. But I think it is an issue that the Europeans recognise is very serious."

This article is from the BBC News website. © British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.

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