ANALYSIS:Avoiding a collapse of confidence in the euro zone was a key concern for finance ministers, writes ARTHUR BEESLEY

DEEPER AND deeper. The expansion of a supersized European Union/International Monetary Fund bailout fund for Greece and its adoption of draconian new budget measures marks a fresh effort by the international authorities to finally nail the country’s debt crisis.

Whether the plan works will have profound implications for the euro currency. At issue now is how markets respond, how millions of Greeks react and how their economy performs as it undergoes shock treatment.

For Socialist prime minister George Papandreou, the key question is whether his government can withstand rising pressure as he seeks to execute a plan that would test the resolve of administrations far stronger than his own.

The measures include: the extension until 2014 of a public sector pay freeze; drastic cuts in allowances and holiday bonuses; VAT and excise increases; higher corporate taxation; and later retirement.

This follows three rounds of cuts in the first three months of this year, which were met with street protests.

The entire package totals €30 billion, a sum significantly greater than the €24 billion mooted late last week.

A two-year extension, to 2014, in the deadline to reduce the deficit below EU limits only prolongs the hardship.

Even as finance minister George Papaconstantinou said Greeks must decide between “collapse or salvation”, the European Central Bank warned that Athens must “stand ready to take any further measures that may become appropriate”.

Although more protests are inevitable, analysts point out that the conservative opposition is enfeebled by its dire economic performance before it left office.

“Without this austerity package, Greece is bankrupt. It’s not pleasant, but I think they are doing the right thing,” said Yannis Stournaras, director of the Foundation for Economic and Industrial Research think tank in Athens.

For now, at least, there is no other way. If months of unyielding punishment on the markets brought Greece and its wary sponsors to this place, the reluctant decision to underwrite the country to the tune of €110 billion smacks of a tacit acknowledgment that previous promises were well short of what was required.

It is an enormous sum, but reflects the challenge Papandreou faces to keep the Greeks afloat in the coming years while repaying the interest on its €300 billion debt mountain.

With Spain and Portugal under pressure as markets question whether their budget plans are sufficient to weather the present storm, increasing the rescue fund stands as an effort to avert the threat of contagion taking hold in sovereign debt markets.

If contagion struck – and we weren’t far off it last week – it would be perilous for the euro and countries such as Ireland, for which participation in the currency is a lifeline.

For all the indecision and prevarication over the Greek bailout, it seems clear enough that there wouldn’t be enough fuel in the bunker to set about a series of ad-hoc rescues.

Thus the avoidance of a precipitous collapse of investor confidence in the wider euro zone was a paramount concern as finance ministers gathered yesterday in Brussels.

After all, soothing words from the European authorities about superior economic fundamentals in Spain and Portugal did little to keep the sharks at bay when Standard Poor’s downgraded their debt last week.

This was ominously in keeping with a recurring feature in this drama: the more the authorities’ response to the Greek dilemma looks insufficient, the wider the ripples.

It was much the same when markets shrugged off an unspecific pledge of “determined and co-ordinated action” from EU leaders in February and made light of a deal only three weeks ago to lend Greece €45 billion this year.

That the sum now on the table is almost three times as large – for release over a three-year period – illustrates both the gigantic scale of the funding challenge and the extent to which previous commitments fell flat.

This is a capitulation of sorts for euro countries, who promised aid while clinging to futile hopes that they would not have to release it.

Now they must sign cheques, very big ones, and be prepared to do the same next year and the year after.

The grind continues. As Greece teeters, the true consequences of currency union become more apparent by the day.