EU wrestling with Greek crisis sequel

At this time of year, Europe's senior politicians, like racehorses sensing the finishing post, usually start thinking of beaches instead of speeches as their work schedule winds down.

But such thoughts are firmly on hold as the European Union grapples with a resurgent debt crisis that, some fear, could destroy the euro.

In May 2010, the EU teamed up with the International Monetary Fund to lend €110 billion ($194 billion) to keep Greece afloat. Just a year later, the rescue that critics dubbed "My Big Fat Greek Bailout" returned as a very unfunny sequel.

Nursing debts equal to 150 per cent of its annual economic output, Greece found it needed more funds, reported to be as much as €120 billion, to avoid defaulting.

Dormant tensions revived. Northern countries lashed Athens for its decrepit tax system and dragging its feet on a promised €50 billion privatisation programme.

German Chancellor Angela Merkel, facing voters' anger at the first bailout, insisted that, in the second rescue, investors who hold Greek bonds should accept an extension on debt maturities. This contribution would amount to a third of the aid.

Her idea sparked bitter protests from the European Central Bank and Jean-Claude Juncker, who heads the 17-nation group of euro-zone ministers.

"We are playing with fire," Juncker warned last week as the crisis worsened. Belgian Finance Minister Didier Reynders compared the risk to the 2008 collapse of the US investment bank Lehman Brothers.

What Merkel intended, said critics, was to postpone when Greece would pay off its sovereign debt, a move bound to be seen by credit-rating agencies as a de facto default.

Investors would flee the euro-bond market, buffeting the highly-indebted economies of Belgium, Spain and Italy and imperilling the very existence of the euro.

Merkel's arm has been twisted by French President Nicolas Sarkozy and she has backed off.

On Saturday she announced enrolment of the private sector would be only voluntary. The hope is European banks will buy new government bonds when old ones mature, a "rollover" scheme used in 2009 for Romanian debt.

The climbdown lifted global markets and the euro and trimmed interest rates for other euro bonds. This is "a first step towards compromise and to salvaging [Europe's] capacity to act," said Andreas Rees of analysts UniCredit.

Even so, the outcome is far from certain. Political obstacles include securing support from the fiercely independent ECB, other eurozone ministers and finally from a EU summit next Friday and Saturday. Countries will need solid assurances that the Greek Government will play the game. Then banks must be coaxed into the rollover scheme, a process charged with risk.

"Under certain conditions, a rollover could be viewed as not truly voluntary by the rating agencies and therefore subject to selective default," cautioned Gavan Nolan of financial researchers Markit. "Getting the balance right between enticing participation at a cost that is reasonable will be difficult."

In Greece, Prime Minister George Papandreou is fighting to keep his head above water.

Fear of unemployment, which has risen from 11.7 to 15.9 per cent of the workforce in the last year, is deep, as is resentment towards the EU and the IMF as they ratchet up demands for belt-tightening and sell-offs. Rioting in Athens last week forced Papandreou to reshuffle his cabinet and he faces a confidence vote this week.