Eurozone finance ministers signaled Monday they would grant their bailout fund greater powers of intervention to prevent the single currency's debt crisis from spreading to Italy and Spain.
The Eurogroup panel held talks for more than eight hours on a day in which markets went into a tailspin. The euro fell to about 1.40 against the dollar, risk premiums on Italian sovereign bonds soared and European stockmarkets plunged.
“We are fully aware that Italy and other countries are in the focus of a part of the financial markets and we believe that (our) general statement ... is offering an adequate response,” Luxembourg Prime Minister and Eurogroup chair Jean-Claude Juncker said.
“Ministers stand ready to adopt further measures that will improve the euro area's systemic capacity to resist contagion risk,” the Eurogroup said in a one-page statement.
The anti-crisis plan would expand the “flexibility” and the “scope” of the eurozone's bailout fund, the European Financial Stability Facility (EFSF), as well as lower interest rates and extend the maturity of loans to bailout countries, the text said.
That could mean that the EFSF would lend Greece money to help it buy back some of its debt at reduced prices - thus reducing its debt burden.
Another suggestion is that the EFSF would buy up Greek debt from banks -reducing the pressure on the country from private creditors, even if the overall debt mountain weighing on Athens would not be reduced.
“I would not at this stage, exclude any option,” EU economy commissioner Olli Rehn said. However, he confirmed that Finland, his home country, was asking for “collateral” payments in return for easing bailout conditions.
Decisions on the way ahead would be taken “shortly,” Juncker promised. “Shortly means shortly, shortly means as soon as possible,” he added.
A second bailout for Greece - expected to be similar in size to the 110-billion-euro package approved last year - should also be agreed “shortly,” the Eurogroup said.
Eurozone finance ministers had earlier pledged to close the deal on Monday, but officials said they were now likely to need another meeting before the end of July.
Last month, EU leaders agreed that the private sector should contribute “voluntarily” to the effort, but attempts to make that happen without triggering a default-like scenario have foundered.
On Monday, the Eurogroup softened its position by dropping earlier references to private lenders making a “substantial” contribution - a development that one EU official said was linked to a change of position on the part of Germany.
However, Juncker insisted that there was no question of letting banks completely scot free.
Ministers also noted the ECB's warning that a “credit event or selective default should be avoided” - but failed to sign up to that point of view.
Earlier, the Financial Times had reported that the eurozone was considering the possibility of allowing Athens to default on some of its bonds as part of the fresh bailout.
The Eurogroup was under pressure to produce results on Monday, after the yield on Italy's 10-year government bonds climbed to 5.67 per cent -pushing the risk differential with Germany's benchmark bunds (bonds) to a record 300 basis points.
Bond markets of other vulnerable eurozone countries were also affected. The spread against German bonds surged for Spain to 337 basis points, with the yield on its 10-year bonds rising to 6.02
per cent, the highest level since November 1997.
Market jitters heightened just days before the publication of European bank stress tests, which are due out on Friday.
The eurozone economies that have been bailed out so far - Greece, Ireland and Portugal - are relatively small. Rescuing Italy or Spain would be far more costly and destabilizing.
Also on Monday, the Eurogroup signed off on the European Stability Mechanism, a permanent bailout facility due to replace the EFSF in July 2013. But even its 500-billion-euro lending capacity would likely not be enough to fund an Italian or a Spanish rescue.
After Greece, Italy has the highest debt level in the eurozone, standing at 120 per cent of gross domestic product (GDP). It is double the 60 per cent of GDP target set for euro member states.
Italian Finance Minister Giulio Tremonti is struggling to push a 40-billion-euro austerity plan through parliament, contributing to the market volatility. He has been resisting calls from Prime Minister Silvio Berlusconi to include tax cuts in the package.
“Italy is in the middle of difficult budget decisions,” German Finance Minister Wolfgang Schaeuble said. “But ... I have absolutely no doubts that Italy will make the right decisions.” - Sapa-dpa