Updated: Thu, 10 Dec 2009 15:55:31 GMT | By Agence France-Presse

Euro leaders stare into Greek debt trap

European leaders on Thursday faced up to fears that swelling Greek debt could drag down the entire euro currency zone and threaten knife-edge economic recovery across the continent.


European leaders on Thursday faced up to fears that swelling Greek debt could drag down the entire euro currency zone and threaten knife-edge economic recovery across the continent.

The heads of the 27 European Union member states gathered for a two-day summit in Brussels that was meant, Europe having exited recession last month, to focus on financing the fight against climate change.

But with Athens caught in the eye of a perfect storm after sky-high public debts triggered market fears of national bankruptcy, dealing with renewed, pressing economic problems would instead dominate proceedings.

Britain's Prime Minister Gordon Brown and French President Nicolas Sarkozy were also to raise proposals with their EU partners for a tax on bankers' bonuses, part of a broader social "compact" they were seeking with financial firms who benefit in hard times.

The duo are demanding "action to redress the balance of risks, rewards and responsibility between society and the financial sector," according to a letter sent by Brown to his fellow leaders, forming the basis of a their dinner converstion.

However, Greek premier George Papandreou would remain the centre of the bloc's attention after the EU's Swedish presidency suggested his country's 300-billion-euro debt albatross requires "support" from the EU "family."

Swedish European Affairs Minister Cecilia Malmstroem said the agenda had effectively been overtaken by the "very serious" events in Greece, and underlined: "We are in a family, we try to support each other."

Finnish Prime Minister Matti Vanhanen warned that leaders would want reassurance that no "surprises" lurk behind Greece's latest promises, saying "the most imporant issue is that we have real information."

Papandreou on Thursday called an all-party crisis meeting aiming to reassure panicked markets that Athens is ready to "clean up" its economy.

Greece's sovereign debt, worth 442 billion dollars, was downgraded this week by the international ratings agency Fitch, prompting fears of dangerous spillover effects for the 16 countries that use the euro.

In Bonn, German Chancellor Angela Merkel said that the European Union shared a "common responsibility" for Greece.

"What happens in a member country influences all the others, particularly when you have a common currency," Merkel underlined.

However, with analysts interpreting political reaction as a precursor to the sort of bail-out assistance offered last year to Hungary, Latvia and Romania, the message was tougher from the European Central Bank.

ECB governing council member and Austrian central bank chief Ewald Nowotny sent a no bankruptcy, no bailout message when asked if Greece could upset the eurozone house of cards.

"An exit or something similar from the eurozone would be totally unrealistic for Greece, and also not do-able," he added.

He said a 'no bailout' principle is anchored in EU treaties and "has to be taken absolutely seriously. It is not possible to defuse the problem here through direct financing."

Meanwhile, internal worries now also extend to Ireland and Spain, which have each received warnings from the ratings agencies. Standard and Poor's has since cast doubts also over Portugal's prospects.

Earlier, the president of the eurogroup, Jean-Claude Juncker, said the budget situation in Greece was "tense" but he underlined: "I totally exclude a state bankruptcy in Greece."

Greece recently revised upwards its deficit forecasts, which now stand at 12.7 percent of its gross domestic product for 2009 and 9.4 percent for 2010.

However, its debts are forecast to rise to 113 percent of GDP by the end of December -- and 120 percent over 2010, figures that raise the spectre of a Latin American-style collapse if left unchecked.

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