Greece meltdown is top issue at EU leaders summit

June 23, 2011 - 5:14 AM
Belgium Europe Financial Crisis

A man holds a sign that reads 'euro crash' during a demonstration in front of EU headquarters in Brussels on Wednesday, June 22, 2011. EU heads of state will hold a two-day EU summit beginning Thursday in which they will discuss the current financial crisis. (AP Photo/Virginia Mayo)

BRUSSELS (AP) — Greece's financial meltdown overshadowed yet another European Union summit on Thursday, forcing leaders to discuss new ways to get the country back on its feet and protect the euro.

Eurozone governments earlier this week delayed any final decision on new aid for Greece until July 3, when they will know whether the parliament in Athens backs massive new budget cuts, government asset sales and economic reforms.

But the first victim of Europe's debt crisis will still dominate discussions Thursday, for without the next euro12 billion ($17 billion) bailout installment Greece will default in mid-July.

European Commission President Jose Manuel Barroso will urge leaders to help Greece access billions in EU development funds to create jobs and make its businesses more competitive.

The funds are designed to help underdeveloped regions catch up with richer parts of the 27-nation bloc. About euro15 billion ($22 billion) is still available for Greece until 2013, but the country is struggling to prove it can use the funds well and come up with matching financing.

However, Barroso's last-ditch attempt to sweeten the new austerity measures Greece must pass faces serious resistance, as some countries are reluctant to make any concessions to Greece before the parliament vote.

"We are ready to look into it in a constructive way, how we can do something in a wise manner?" said a German government official. "But the precondition is that the austerity measures pass the Greek parliament before."

The official declined to be named in line with department policy.

Other, poorer countries are likely to frown at easing the rules for just one country.

Leaders will also take another look at finance ministers' decision to ask banks and other private creditors to share the burden of a second massive bailout for Greece, on top of the euro110 billion ($158 billion) the country was granted a year ago.

The German official said discussions with banks have already started, adding that the eurozone was in close talks with rating agencies and the European Central Bank to avoid triggering a negative rating.

If rating agencies declared Greece to be in partial default of its debts that could spark panic on financial markets, hurt Greek and European banks and endanger other EU nations struggling with heavy debt.

EU President Herman Van Rompuy will also make a push for eurozone leaders to give an even clearer sign they will fund a second rescue package for Greece as long as Greece manages to push through the new austerity measures in a June 28 vote.

The International Monetary Fund, which has provided about one-third of the European bailouts, has made continued financing for Greece a precondition to paying out its share of a euro12 billion ($17 billion) installment of Greece's first rescue package.

Despite all these efforts, however, many financial experts believe that Greece's debt burden is too great in the long term and the country is heading for an eventual default.

The divisions among EU countries are reaching beyond the problems of Greece. Another key item planned for the summit — the formal appointment of Mario Draghi as the new president of the ECB — may be put off as fellow Italian executive board member Lorenzo Bini Smaghi has so far refused to leave his post.

The French, who with the departure of current ECB President Jean-Claude Trichet on Oct. 31 would not have a representative on the board, will only support Draghi if a Frenchman or a woman takes over Smaghi's spot.

European finance ministers, the European Parliament and the board of the ECB have already backed Draghi, but without the formal approval of the leaders his appointment will not be valid.

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David McHugh contributed from Frankfurt.