Eurozone finance chiefs say Greece will get loan installment despite country's admission that it could not reduce its deficit as much as promised

Cindy Allen

LUXEMBOURG , October 4, 2011 (Associated Press) – The eurozone's finance chiefs indicated early Tuesday that Greece will get a loan installment it needs to keep paying its bills, even after Athens admitted that it would not be able cut its budget deficit as much as it had promised in return for help.

Fears have been growing that Greece, despite billions of euros in rescue loans, will eventually have to default on its massive debts, rocking the global economy as it is still struggling to recover from recession.

"We had no one advocating a default for Greece. Everything will be done to avoid that and it will be avoided," Jean-Claude Juncker, the Luxembourg prime minister who also chairs the meetings of eurozone finance ministers, said after talks that ran late into the night.

Juncker said the other ministers would decide on the payment of the euro8 billion ($10.8 billion) slice of its first euro110 billion bailout "in the course of October," adding that the country would be able to meet its financial obligations as long as it receives the money in November.

That contradicted earlier statements from the Greek government, which has said that it would be forced to stop paying salaries and pensions if it doesn't get the payment by mid-October.

The financial leaders of the 17-country eurozone were under strong pressure to provide solutions to the currency union's worsening debt crisis, after markets around the world plunged Monday. However, despite the assurances on Greece, it was also clear that further challenges lay ahead and the euro dropped after the news conference, trading down 1.3 percent against the dollar.

Greece said Sunday that it will run a deficit of 8.5 percent of economic output, or euro18.69 billion ($25.2 billion), this year -- far above the promised euro17.1 billion ($23.1 billion).

The main concerns among economists is that Greece will not be able to fully repay its bonds, triggering steep losses for banks across Europe and spreading the debt crisis to large economies like Italy and Spain that are too big to be bailed out.

Even though he ruled out a Greek default, Juncker added to those concerns, saying that the contribution of banks and other private investors to a second, euro109 billion rescue package for Greece may have to be re-evaluated in light of the worsening economic conditions in the country.

Germany and several other rich eurozone countries have been pushing to force larger losses on private investors than the 21 percent writedowns on Greek bonds they tentatively agreed to in July. That push has weighed on bank shares especially in France and Belgium, where several lenders have large exposures to Greek debt.

At the same time, there is concern that Greece is falling into a spiral of further cuts and bailout loans, with its economy shrinking and popular unrest rising even further.

While the EU's Monetary Affairs Commissioner Olli Rehn said recently announced measures "go a very long way to meeting the conditions" for the next payout, he also said that Greece will be expected to make up for delayed economic reforms and privatizations.

Further measures may also be needed to meet targets in 2013 and 2014, on top of a five-year, euro28 billion austerity package agreed just over the summer.

The eurozone hopes that the payment of the next aid installment to Greece will buy them time to come up with a broader solution to the crisis and reinforce their financial safety nets.

They are working on boosting the firepower of their main bailout fund, the euro440 billion European Financial Stability Facility, without requiring countries to increase their financial commitments. That could be done by allowing the fund to tap loans from the European Central Bank or guarantee the bond issues from struggling countries like Italy and Spain.

"We need a more flexible and powerful EFSF as a financial firewall to contain contagion" and allow for the recapitalization of weakened banks, said Rehn. However, both he and Juncker declined to give details on how that could be done.

The ministers made progress on several technical issues related to the second rescue package for Greece. They found a complicated solution to Finland's demand to receive collateral for its contribution to the bailout, that they said would be acceptable to the country but tied to enough discouraging conditions to keep other countries from demanding similar treatment.

"It's unlikely that any other country but Finland will make this request," said Klaus Regling, the head of the EFSF who helped work out the collateral deal.

Juncker meanwhile said that Slovakia's parliament will likely approve changes to the EFSF agreed by eurozone leaders at their summit in July.

Slovakia's finance minister "indicated that there will be a positive vote," Juncker said.

The leader of the junior party in Slovakia's governing coalition has threatened to bloc changes to the eurozone's bailout fund that would give the fund new powers and increase its lending capacity. Changes to the fund have to be approved by all 17 euro countries to take effect.

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