Europe delayed the release of bailout funds to Greece yesterday, demanding Athens make more sacrifices and warning banks may have to share more of the pain in the crisis threatening the eurozone.
Stock markets tumbled after European finance ministers said Greece could wait until early November to receive €8 billion, the next installment of an EU-IMF €110 billion bailout, held up since last month.
There was also mounting concern that the eurozone debt crisis may claim its first bank, with shares in Dexia plunging 37 per cent on concerns it may collapse or be broken up.
Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of eurozone finance ministers, called on Greece to agree “additional measures” with international auditors “to close any remaining gaps for 2013 and 2014.”
Mr Juncker also said a rescue fund to be used for a second Greek bailout, that was agreed in July but is now frozen with auditors demanding a three-year rewrite of Athens’ spending plans, will be made more “efficient”.
But he said ministers were not considering an increase in the size of the €440 billion European Financial Stability Facility, as suggested by the United States and others.
Swedish Finance Minister Anders Borg warned that Greece risks missing budget targets demanded by creditors and said measures need to be taken to protect Europe, including a possible restructuring of banks.
“It is quite clear that there is an evident risk that the Greek programme is off track,” Mr Borg told reporters. “We have to rethink how we can move faster forward towards backstops and firewalls to handle the situation.”
The delay in unblocking the €8 billion, originally set for release in September, prompted Greek Finance Minister Evengelos Venizelos to suggest Athens was being made a “scapegoat” for wider eurozone debt troubles.
Mr Venizelos however was sent back to the drawing board to secure creditors’ agreement on a new massive overhaul of the rapidly shrinking Greek economy, and enable a final decision on the loan funding before the end of this month.
A decision on the aid to Greece is expected before an EU summit on October 17 and 18.
“I thought that we would need to take a decision because Greece had pressing needs, but we are told that it is for the beginning of November,” said Belgian Finance Minister Didier Reynders.
He said the ministers are waiting for a report from the “troika” of auditors in Greece – the European Commission, the European Central Bank and the International Monetary Fund.
Global pressure is now on to resolve the problems before G20 leaders meet in Cannes, France, on November 3 and 4, after a warm-up gathering of finance ministers in Paris on October 14 and 15.
There was also bad news for Greece’s private sector creditors whom Mr Juncker warned to expect greater losses on their Greek sovereign debt holdings than the 21 per cent haircut already agreed in July.
The private sector agreed to participate in a second bailout of Greece, with the eurozone and IMF providing €109 billion in new funds.
“As far as PSI (private sector involvement) is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21,” the Luxembourg Premier said.
This would be bad news for European banks, many of which have extensive holdings of Greek sovereign debt, and some governments are worrying about how much they will have to give their banks in the event of a Greek default.
Shares in Dexia plunged by 37 per cent yesterday’s trading when the bank’s directors indicated it may need major restructuring, prompting France and Belgium to pledge to guarantee its debts.
“Dexia’s problems stress the point that for eurozone leaders the Greek crisis is less about Greece and more about the potential for it to spark a much more widespread banking and economic disaster,” said Rabobank analyst Jane Foley. Stock markets closed down in Asia and tumbled as they opened across Europe yesterday morning, from falls of 3.40 per cent in Hong Kong and 1.05 per cent in Tokyo and drops of 3.5 per cent in Frankfurt and 2.6 per cent in London.