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New Greek finance minister faces first big test

New Greek finance minister faces first big test

June 19th, 2011 by GABRIELE STEINHAUSER, AP Business Writer in News

BRUSSELS (AP) - On only his third day in office, Greece's new Finance Minister Evangelos Venizelos faces his first big test: He must convince his eurozone counterparts to release a vital loan installment his country needs to avoid defaulting on its massive debts next month, and to commit to billions in new loans to keep Greece afloat in the coming years.

It won't be easy. The eurozone and the International Monetary Fund have based their approval of new money on passing budget cuts worth some €28 billion ($40 billion) as well as an unpopular €50 billion privatization program before the end of the month.

Those measures have already sparked massive protests and forced Prime Minister George Papandreou to reshuffle his government, promoting former rival Venizelos to the key finance post.

At Sunday night's meeting in Luxembourg, Venizelos will face a difficult audience. The IMF and Germany, the two single biggest contributors to Greece's existing bailout, have already had to back away from previous demands as panic swelled in markets around the world, giving Europe and Greece more space to sort out their differences.

The IMF indicated that it will sign off on its portion of the net loan installment even if a new, longer-term bailout program has not yet been finalized. That €12 billion must land in Greece's account by mid-July to repay billions of euros in maturing bonds. The move flouts the IMF's own rules, which usually require that a rescued country's finances be secure for the coming 12 months before any money can be transferred.

Germany, meanwhile, softened its stance on a more forceful involvement of banks and other private investors in a new bailout for Greece, saying Friday that any private-sector contribution will be voluntary and won't spark a so-called "credit event," a partial default by a country that threatens to hurt Greek banks and shake financial markets.

The exact role of the private sector in a new bailout, will feature high in talks that will likely last deep into Sunday night and continue Monday morning.

Just over a year after being granted €110 billion in rescue loans, Greece is trailing the targets set out in the bailout program and without the new measures its budget deficit will remain above 10 percent of economic output this year - far from the promised 7.5 percent. The country's debt is expected to reach 160 percent of gross domestic product by the end of 2011, while its economy continues to shrink.

The EU has called for Greece's Socialist government to get the backing of the main opposition party for the measures set out in the bailout program, as they will require tight budgeting for years after Papandreou's current term expires. But so far opposition support is elusive and Papandreou earlier this week had to enter emergency talks with his own party of stem defections from lawmakers.