The leaders are caught between their increasingly frustrated partners in the European Union for failing to pass the reforms quickly and workers who went on strike on Tuesday to protest against the austerity measures.

European Union (EU) officials say the full package must be agreed with Greece and approved by the euro zone, European Central Bank and International Monetary Fund before February 15 to allow time for complex legal procedures involved in the bond swap to be completed in time for a March 20 bond redemption.

In some euro zone countries, including Germany and Finland, parliamentary approval is required to raise the bailout money.

In Paris, German Chancellor Angel Merkel on Monday expressed the exasperation among euro zone leaders at seemingly endless arguing in Athens that has yet to produce a definitive acceptance of the austerity and reform demanded by the lenders.

“I honestly can’t understand how additional days will help. Time is of the essence. A lot is at stake for the entire euro zone,” she told a news conference with French President Nicolas Sarkozy.

But leaders of the three parties in the coalition government appeared to need at least one additional day.

The office of Prime Minister Lucas Papademos, a former central banker who heads a government of politicians, said that a meeting of leaders from the conservative, socialist and far-right parties due on Monday had been postponed to Tuesday.

No reason was given for the delay. Papademos held further talks with the “troika” of lenders – the European Commission, ECB and IMF – on Monday.

The party leaders, positioning themselves for a likely general election in April, have balked at accepting another package of deeply unpopular wage and pension reductions, job cuts and tougher tax enforcement measures.

Alarmed by the prospect of yet more budget cuts, Greece’s two main trade unions said they would hold a 24-hour strike on Tuesday in protest against policies they say have only driven the economy into a downward spiral.

Demonstrations are planned in central Athens.

PATIENCE WEARING THIN

Greeks watched the political drama with the same exasperation they have shown throughout the nation’s nearly three-year crisis, mixed with fear of the consequences of leaving the euro.

“We are stuck between a rock and a hard place. We are lost either way but political leaders have to agree,” said Kosmas Georgiou, a 31-year old company inspector. “Going back to the drachma is not an option, it’s disaster.”

“They are delaying this just to look like heroes.”

Merkel made clear that her patience was wearing thin on a deal that affects not only Greece but the wider currency bloc, which fears that a default would hit much larger economies such as Spain and Italy.

One government official said the entire Greek side had to agree terms of the rescue, which would be the second for Athens since 2010, with international lenders before the next meeting of the Eurogroup of euro zone finance ministers.

No date has been set for the Eurogroup meeting, and a European Commission spokesman said it would be held only when Greece had made a commitment to the deal.

Papademos said after five hours of talks on Sunday that party chiefs had agreed measures including wage cuts and other reforms as part of spending cuts worth 1.5 percent of gross domestic product.

But leaders of the PASOK socialist party, the conservative New Democracy and the far-right LAOS party still have to reach agreement on several unresolved issues.

These include labour market reform and shoring up domestic banks. Greece needs the bailout money by mid-March to meet big debt repayments but tempers are rising in the EU over what it sees as Greek dithering on implementing reforms.

Greeks have been worn down by a deep recession, now in its fifth year, and wave after wave of austerity measures imposed under the first bailout.

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Controversy surrounding the ECB’s bond buying programme has escalated in recent weeks. The IMF and private sector have urged it to write down its holdings of Greek bonds, or at least forgo profits, as part of a deal to stabilise the country’s finances.

The ECB is also still at the centre of a fierce political tug-of-war. With German backing it is continuing to resist calls from France and Italy as well as the United States, Britain and Russia to be more aggressive in its buying.

The bank’s latest purchases added up to just 63 million euros, leaving the total it has spent on bonds since starting the buy-ups back in May 2010 at 219 billion euros.

That is a drop from the low-ball 2.24 billion it spent the week before and are just a fraction of what it had been spending when the euro zone debt crisis escalated towards the end of last year. (For details click)

Analysts said the debate surrounding the ECB Greek bond holdings may have encouraged it to limit its market activity and although Portugal is under pressure it does not need to raise long-term funding this year.

It has been a mixed couple of weeks in the euro zone debt crisis.

While last month’s half a trillion euro injection of ECB funding has seen improvements in Italy and Spain, Portugal’s borrowing costs have jumped by more than a third to over 16 percent, sparking fears it will require a second bailout from its euro zone neighbours and the International Monetary Fund.

Talks on convincing Greece’s lenders to write off half their money have also dragged on, adding uncertainty to the situation, although most economists still expect a deal in time to avoid a chaotic default in March.

Portugal woes are starting to unsettle markets. While the premiums investors demand to buy its bonds have been rising fast, the ECB appears to be largely ignoring the problem with traders noting the bank’s absence from bond markets.

Many see the ECB as the only institution with firepower to calm bond markets if the debt crisis worsens, but ECB President Mario Draghi and other top policymakers have continued to reject calls for the bank to ramp up its purchases.

Critics, including Juergen Stark who recently quit the bank over the purchases, argue they tread dangerously close to the ultimate ECB taboo of financing euro zone governments.

Yves Mersch, the ECB’s longest serving policymaker, reiterated the wider bank’s scepticism over the weekend, saying the purchases had no long-term future and that he and his colleagues were always looking for alternatives.

LISBON APPETITE

Despite rising market worries about Lisbon, the ECB knows the country is covered for the rest of the year by its EU/IMF bailout programme.

Reducing anxiety over other debt-strained countries such as Italy and Spain and improvements in the bank-to-bank lending market in the wake of its huge cash injection last month is also likely to have encouraged the bank to reduce its bond buys.

“Amid these more benign circumstances, the ECB seems to have deemed the fine-tuning of sovereign yields to ensure the transmission of monetary policy as largely unnecessary,” said Berenberg bank economist Christian Schulz.

“Despite the sell-off in Portuguese bonds, massive ECB bond purchasing would be unnecessary since Portugal does not need to access financial markets for long-term financing in 2012.”

Deutsche Bank economist Mark Wall added that recent build-up of pressure for the ECB to join the private sector banks and investment funds in taking losses on their Greek bonds may also influence the central bank’s bond-buying decisions.

“The market would like the ECB to be involved (in the Greek debt relief deal) as it has been seen as senior claimant and so if it too took losses that view would no longer exist,” Wall said.

“What last week’s numbers perhaps show is that if the ECB has to absorb losses then perhaps it would be less inclined to buy bonds under its Securities Markets Programme, so maybe the market should be careful what it wishes for.”

The ECB and the 17 euro zone national central banks buy the bonds under what the ECB calls its Securities Markets Programme (SMP). European laws forbid it buying the bonds direct from governments but it gets round the restriction by buying them from banks and other investors on the open market.

It reactivated the programme last August after a four-month break when Italy and Spain, two of the euro zone’s biggest economies, began to get dragged into the eye of the debt crisis. Since then it has spent around 140 billion euros.

The amounts bought are reported by the bank every week but take two to three days to settle, meaning that when it is buying, the figures do not necessarily give a full picture.

It doesn’t give a country-by-country breakdown of its purchases either, but euro zone sources say it has bought around 40 billion euros of Greek debt and has concentrated largely on Italian and Spanish debt since the August restart.

As usual, the ECB will hold a ‘sterilisation’ operation on Tuesday to neutralise the inflationary pressure the bond buys create, a move it does by getting banks to put down 7-day deposits equalling what it has spent in total on bonds.

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The European Stability Mechanism, which will have a lending capacity of 500 billion euros, will take over from the European Financial Stability Facility, a temporary mechanism that has so far been used to bail out Ireland and Portugal.

“There is a deal but the treaty will be signed at a later stage,” one EU official said. Two other EU officials confirmed the news.

The ESM was originally expected to come into force in July 2013, but Germany pushed for an earlier introduction so that a more stable, permanent fund with paid-in capital could be set up, building a stronger firewall against the debt crisis.

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The idea, floated by Berlin, to strip the government in Athens of its sovereignty and give the power to make decisions on finances to a special EU commissioner, opened up clear fault-lines both within and outside the eurozone.

It could ultimately place in doubt Greece’s second bailout, agreed in October but bogged down amid a series of new conditions.

German Chancellor Angela Merkel and Greek Prime Minister Lucas Papademos arrived around half an hour before the European Union’s first summit of the year began shortly after 1400 GMT.

Merkel preferred not to make a big deal of plans circulated to finance ministry officials on Friday.

Without pulling back on the subject, she said the debate should now be about “how Europe can help Greece accomplish the tasks given to it.”

Papademos then walked through the leaders’ entrance without saying a word.

But the proposal — termed “the product of a sick imagination” by a Greek minister on Saturday after the plan was leaked — was slammed by Luxembourg Prime Minister Jean-Claude Juncker.

“I am strongly against the idea of imposing a commissioner with that mission only to Greece. That’s not acceptable,” said Juncker, who chairs the key grouping of eurozone finance ministers.

Austrian Chancellor Werner Faymann also said the German proposal “doesn’t achieve anything and it goes in the wrong direction.”

However, the German plan drew what looked like solid if cautious support from Swedish Prime Minister Fredrik Reinfeldt.

“They are not delivering on reforms,” he said of Greece and EU frustration with broken promises.

“Which is why we are having this discussion,” he said.

“I can understand that.”

Dutch Prime Minister Mark Rutte would not comment on “another country’s” proposal, but echoed that Greece can not expect to receive bailout aid without making sacrifices.

“Greece must also honour the commitments it has made with us,” he said.

Greece has been promised a second bailout of 130 million euros ($171 million).

But at the weekend, German Finance Minister Wolfgang Schaeuble told the Wall Street Journal that “unless Greece implements the necessary decisions and doesn’t just announce them … there’s no amount of money that can solve the problem.”

With the country buried under a mountain of debt, Greece is seeking to wrap up a deal with private investors that have been asked to take a “haircut” worth about half the 200 billion euros owed to them.

The EU had wanted to use its New Year gathering to send out a message of optimism.

EU President Herman Van Rompuy said on Twitter that Monday’s talks, held amid a general strike over EU-ordered austerity for host country Belgium, would open up a “path to hope.”

Later, leaders were to agree a German-driven pact to toughen fiscal discipline, despite Polish demands revealing new tensions.

They could point to an improved economic confidence survey and another successful debt auction for Italy.

But stocks slid awaiting news on Greece, and Spain plunged quicker into what Brussels deems a “moderate” recession looming large over Europe.

Leaders, some facing imminent re-election campaigning, must contend with an unemployment rate averaging 10 percent across the 17-nation eurozone.

Ideas include lowering the tax burden on employers to get more people hired, and giving all youths guaranteed options in work, training or study.

Britain opted out of the new “fiscal compact” in December, and Polish Prime Minister Donald Tusk said Monday that Warsaw is thinking again.

“We will not accept it in its present form,” said Tusk, who wants non-euro governments to be given a bigger say in eurozone economic governance, which France rejects.

A discussion about whether to increase the size of a new permanent rescue fund from July, the European Stability Mechanism (ESM), is to wait until March.

This new “firewall” is planned to have firepower worth 500 billion euros, but may be raised to 750 billion euros.

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European Union heads of state and government hold their first summit of the year from 1400 GMT to finalise a new German-driven pact to toughen budget discipline.

They do so amid a general strike in Belgium over deepening austerity in their own country.

With recession looming large over Europe, leaders will also try to find ways to jumpstart the economy and reduce an unemployment rate averaging 10 percent across the 17-nation eurozone.

Ideas include lowering the tax burden on employers to get more people hired, and giving all youths guaranteed options in work, training or study.

Two years into a crisis that forced Greece, Portugal and Ireland to take bailouts, European governments will put the finishing touches on the new “fiscal compact” to prevent future debt debacles.

Public anger over the austerity-first policy sweeping the eurozone was on full display in Belgium, where the strike halted the Eurostar and Thalys international rail lines, forced flight cancellations and brought public transport in Brussels to a standstill.

The pact will apply to 26 countries inside and outside the eurozone, excluding Britain, and those that want to tap future rescue funding will have to ratify this treaty on fiscal discipline in order to do so.

Hoping to shield two other nations in financial trouble, Italy and Spain, EU leaders will put the finishing touches to a rulebook for a permanent rescue fund, the European Stability Mechanism (ESM), a financial “firewall” worth 500 billion euros.

Several governments hope that the treaty on fiscal discipline, demanded by Berlin, will convince Germany to back an increase to the ESM to 750 billion euros.

It could also prompt the European Central Bank to step up its purchase of bonds from governments paying higher risk premiums on commercial markets.

Weary of contributing to bailouts, Germany is pushing a plan for Athens to be placed under stewardship with the eurozone appointing an EU commissioner who could veto Greek budget decisions.

German Finance Minister Wolfgang Schaeuble warned that only radical reforms in Greece could unlock a second bailout of 130 million euros ($171 million), negotiated in October.

“Unless Greece implements the necessary decisions and doesn’t just announce them … there’s no amount of money that can solve the problem,” he told the Wall Street Journal.

The German idea has angered Athens, with Greek Education Minister Anna Diamantopoulou calling it the “product of a sick imagination.”

One EU diplomat told AFP that the plan put forward by Berlin for Greece to cede budgetary sovereignty to Brussels on a temporary basis was simple blackmail, but other diplomats saw a trend.

Greek Prime Minister Lucas Papademos, meanwhile, said Sunday there was “total convergence” among his political allies on new austerity measures needed for a second bailout and on debt cuts to avert default.

With the country buried under a mountain of debt, Greece is seeking to wrap up a deal with private investors that have been asked to take a “haircut” worth about half the 200 billion euros owed to them.

Talks have been snagged on the amount of interest to be paid on the remainder, with Athens facing a critical bond reimbursement worth 14.5 billion euros on March 20.

Greek Finance Minister Angelos Venizelos told reporters Saturday he was hopeful of a deal within days.

The voluntary bond exchange, which aims to wipe out 100 billion euros ($130 billion) off the country’s debt of 350 billion euros, is a pre-condition for Athens to receive the second bailout, although senior EU sources say governments may have to dig deeper into their pockets to help Greece.

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The debate must be on “how Europe can help Greece accomplish the tasks given to it,” Merkel said on arrival at an EU summit after Greek officials and some European leaders rejected the proposal.

“But all of this will only work if Greece and other (EU) member states talk about it. This is why I do not want a controversial debate but a discussion that achieves success,” she said.

The German suggestion to put Greece under stewardship cast a shadow over the summit which is aimed at sealing a fiscal pact to toughen budget discipline across the EU, finalising a rescue fund and finding ways to counter recession.

The idea that Greece might cede budget control to the EU was contained in a German submission to its eurozone partners first revealed late Friday by the Financial Times and confirmed by European sources.

Under the radical plan, denounced by Greek officials, a commissioner appointed by the 16 other eurozone finance ministers could veto budget decisions made by Athens.

German Economy Minister Philipp Rösler earlier on Monday had backed beefed-up EU monitoring of Greece on Monday.

Rösler, who is also Germany’s vice chancellor, told the daily Bild that the European Union should step in to ensure that Greece toes the line of budget austerity as it struggles to emerge from a crippling debt crisis.

“We need more leadership and monitoring in implementing the course of reform (in Greece),” he was quoted as saying. “If the Greeks fail to do this themselves, the leadership and monitoring must come in a stronger way from outside, for example via the EU.”

Rösler said that patience in Germany, the paymaster for the eurozone’s bailouts, for Greece was wearing thin.

“Time is running out,” he said. “There can only be more assistance if the Greek government finally carries out the necessary reforms. The Greeks must finally send a clear message that they mean what they say,” he added.

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Rösler, who is also Germany’s vice chancellor, told the daily Bild that the European Union should step in to ensure that Greece toes the line of budget austerity as it struggles to emerge from a crippling debt crisis.

“We need more leadership and monitoring in implementing the course of reform (in Greece),” he was quoted as saying. “If the Greeks fail to do this themselves, the leadership and monitoring must come in a stronger way from outside, for example via the EU.”

The idea that Greece might cede control over its budget to the EU was contained in a German submission to its eurozone partners revealed late on Friday by the Financial Times and confirmed by European sources.

Under the radical plan, a commissioner appointed by finance ministers from the other 16 eurozone states would be able to veto budget decisions made by Athens.

The scheme emerged ahead of an EU summit in Brussels on Monday focused on a new fiscal pact to restore budgetary discipline and the confidence of the markets in the crisis-wracked bloc.

Greece angrily rejected the bid Saturday, with Education Minister and former EU commissioner Anna Diamantopoulou calling the notion “the product of a sick imagination.”

The European Commission also said there was no question of Athens surrendering budgetary control.

Roesler said that patience in Germany, the paymaster for the eurozone’s bailouts, for Greece was wearing thin.

“Time is running out,” he said. “There can only be more assistance if the Greek government finally carries out the necessary reforms. The Greeks must finally send a clear message that they mean what they say,” he added.

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Schlecker managers said an insolvency petition would be delivered “shortly” to a court in Baden-Württemberg, where the company is based. A planned financing package is said to have fallen through, forcing the company’s hand.

The move is not expected to have an immediate impact on the company’s roughly 30,000 German employees and 17,000 abroad or result in immediate closures of its 10,000 stores.

Instead, it will buy the company time to reorganise in an attempt to keep a streamlined version of the business running.

“We believe in the viability of the company,” a spokesman said.

Reports of supply shortages and financial difficulties have dogged Schlecker recently, although managers insisted all was well, and even talked of making a profit this year after several years in the financial doldrums.

But there have been signs for some time that Schlecker was struggling. Revenues declined by hundreds of millions of euros over the past two years and 1,000 branches were closed. Meanwhile the company launched a renovation campaign in an attempt to compete with more fashionable drug retailers.

A series of highly-publicised complaints from employees who have complained of mistreatment by management, and customers who accuse the chain of being old-fashioned and stuffy also added to the firm’s woes.

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The paper says both ING and Rabobank have drawn up their own plans to gradually cut back on the tax break and handed them over to the banking association NVB.

NVB chairman Boele Staal said on Monday the organisation wants to talk about ‘necessary reforms’ to the housing market without ‘taboos and blockades’. He was speaking at a New Year drinks party for the sector.

Uncertainty

The banks say uncertainty about the tax break on mortgage interest payments is one of the main reasons why houses are not selling at the moment.

Earlier this month central bank president Klaas Knot said home owners should be able to borrow no more than 90% of the value of their house. At the moment people can borrow 106% of the value of their homes but a gradual reduction to 90% would ‘bring stability’ to the housing market, Knot said.

In November, the central bank called on the government to limit the tax breaks for mortgage holders, saying the current system is damaging the country’s financial stability.

Generous

The Dutch system is one of the most generous in Europe – home owners can fully deduct all the interest from tax for 30 years – and the current government has pledged to leave it untouched.

The Rabobank plan envisages tax relief being restricted to mortgages which involve paying off the loan, while ING proposes stopping the tax break overnight – in 30 years time.

Staal said he did not have a preference for either option. ‘No-one believes mortgage tax relief will be left alone by the next government,’ he said.

The current cabinet has committed itself to making no changes, and Geert Wilders, whose anti-Islam party props up the government, says he will go for an election if ministers change their mind.

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“There has been no agreement on any Greek deal or a specific ‘haircut’,” said Charles Dallara, the head of the Institute of International Finance which is representing the banks in EU negotiations.

“We remain open to a dialogue in search of a voluntary agreement. There is no agreement on any element of a deal.”

FROM CORRESPONDENTS IN WASHINGTON AFP

http://www.theaustralian.com.au/business/breaking-news/banks-say-no-deal-on-greek-debt/story-e6frg90f-1226178029025

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