European leaders to haggle over Greece bailout program as euro trades near 10-month low

EU haggles over safety net for Greece

BRUSSELS — Eurozone leaders will Thursday thrash out how to throw Greece a financial lifeline, with Germany demanding that aid has to be a last resort and must involve the International Monetary Fund.

Spain and Greece countered Germany’s stance by calling on EU governments to use an existing €50 billion ($67 billion) bailout fund to offer cheap loans to Greece or other struggling eurozone governments.

The euro currency was trading near a 10-month low as European Union leaders headed into a summit dominated by Greece’s debt crisis. Athen’s financial woes have undermined the euro and raised fears that the trouble will spread to other troubled euro governments such as Portugal and Spain unless a solution is found.

German Chancellor Angela Merkel has said any bailout must wait until Greece is on the verge of defaulting, and must involve the Washington, D.C.-based IMF.

But Greek Prime Minister George Papandreou said the proposal to expand an existing bailout fund reserved for non-euro EU countries was “a clear solution and a simple one.”

The fund has raised money at low rates by borrowing from bond markets and passing the loan on to Hungary, Latvia and Romania as part of rescue packages led by the International Monetary Fund. It is meant only for EU members that haven’t adopted the euro — but Spain and Greece want legal changes to open it up to all EU countries.

Merkel earlier insisted that any European bailout for Greece could only come in an “exceptional emergency” where Greece was unable to borrow from bond markets and the stability of Europe’s currency union was at risk.

Market worries over the lack of a safety net for a troubled member of Europe’s currency union drove the euro down to $1.3325, its lowest level since May. A euro bought $1.51 in late November.

Other eurozone leaders were calling for a deal despite German resistance at a two-day meeting of European Union leaders to help Greece overcome its debt crisis.

Spanish Prime Minister Jose Luis Rodriguez Zapatero said “it is our job to find a European solution to Greece’s problems.” Luxembourg’s Jean-Claude Juncker said he was “convinced there will be a mixed solution of IMF involvement and bilateral aid” from individual eurozone nations.

Greece has been able to borrow by selling government bonds, but only at high interest rates that Papandreou has said are crippling his efforts to plug a huge budget deficit. He says a backstop is needed that will bring down those rates.

The bailout fund plan put forward by European socialists — including the governments of Spain, Greece, Hungary, Slovenia and Austria — would see the European Commission borrow money from markets at low rates and offer them on to eurozone nations in trouble.

“I can tell all German taxpayers, this will not cost you one euro,” the head of Europe’s socialist party Poul Nyrup Rasmussen told reporters.

Germany sees itself as a fierce defender of prudent budget spending and is unwilling to use its taxpayer money to help Greece, which overspent and faked budget figures for years. Merkel also faces a key regional election May 9 which could damage her center-right government by overturning its majority in Germany’s upper house of parliament.

Merkel claimed France would join Germany and “actively support a decision involving the IMF” and individual loans from eurozone nations. Spain’s Zapatero said he saw no problem with IMF help.

France is softening its previous opposition to the IMF, hinting that it could support its aid as part of a European package.

The European Central Bank is fiercely opposed. ECB board member Lorenzo Bini Smaghi told German weekly Die Zeit on Thursday that market reaction showed that IMF involvement “could be damaging for the stability of the euro.”

“If the IMF intervenes, the image of the euro would be that of a currency which is only capable of surviving with the support of an international organization where Europeans don’t have a majority,” he said.

The Washington, D.C.-based international lending agency has already bailed out three European Union members — Hungary, Romania and Latvia — but none use the euro. Calling in the IMF would underline the eurozone’s inability to deal with the crisis on its own.

The failure of the 16 euro nations to prevent Greece and other countries running up huge debts — or bail them out when they get into trouble — shows up the flaws in the way the currency is managed.

Merkel said eurozone nations need to learn the right lessons from the financial crisis and toughen sanctions against countries that run budget deficits above the EU limit of 3 percent of gross domestic product. She said it would be “disastrous” to abandon these rules.

“There must be an end to cheaters,” she said.

Associated Press writers Raf Casert, Elena Becatoros, Debbie Seward, Gretchen Mahan and Robert Wielaard in Brussels, Kirsten Grieshaber and Geir Moulson in Berlin and Carlo Piovano in London contributed to this story.