European Union finance ministers promised to do everything to defend the euro from the "wolfpack" of the financial markets as they began talks today on emergency measures to stop Greece's debt crisis spreading.
The European Commission will present the ministers with a proposal on a stabilisation mechanism intended to provide a multi-billion euro safety net for other euro zone countries such as Portugal and Spain. Bond yields of these countries have been rising sharply - increasing the risk premium investors carry to hold their debt - on market concern they may be next to need assistance.
The threat that markets would turn against the three states next triggered a call from euro zone leaders on Friday to come up with a solution to the crisis before markets open tomorrow.
"We are going to defend the euro," Spanish economy minister Elena Salgado told reporters as she arrived for the talks.
"We now see ... wolfpack behaviours, and if we will not stop these packs, even if it is self-inflicted weakness, they will tear the weaker countries apart," Swedish finance minister Anders Borg told reporters on arrival for the meeting. "So it's very, very important that we now make progress, both when it comes to consolidation - not only long-term but short-term consolidation - but also when it comes to a common facility to deal with the urgent problems," he said.
Any deal will have to be approved by a majority of the 27 EU member states.
Greece, which had a budget deficit of 13.6-14.1 per cent of GDP in 2009 and debt of more than 115 per cent of GDP, has already secured a €110 billion three-year loan package from the euro zone and the International Monetary Fund after its costs of borrowing rose to unsustainable levels.
"We ... need resources to stop the market turmoil. If this goes on for more than a couple of days it will be very, very problematic for the recovery," Mr Borg said.
EU sources said the European Commission will ask EU finance ministers to extend an existing aid mechanism for non-euro zone countries to countries using the single currency. The commission will also ask the extraordinary meeting of ministers to raise the existing amount available under the mechanism, called the balance-of-payments facility, by €60 billion. The maximum available now is €50 billion.
EU sources said the €60 billion top-up would be used as base capital, or collateral, for borrowing on the markets, which would allow the commission to raise up to 10 times that amount. The top-up would be guaranteed by all 27 members of the European Union and the loans, if paid out to an EU member, would carry conditions set by the International Monetary Fund, one EU source said.
Funds previously raised via the facility are rated AAA - top investment grade - by major credit ratings agencies.
As an additional measure for euro zone countries only, the commission will propose a separate mechanism of intergovernmental loans, the source said. A similar mechanism has already been successfully used in the cases of Latvia, Romania and Hungary after the pool of money available was increased to €50 billion last year.
The mechanism could be used on the basis of an EU law which says that if a member of the EU is in difficulties caused by circumstances beyond its control, EU ministers may, under certain conditions, grant it financial assistance.
"The situation in the financial markets has gone in a very bad direction, even though the Greek situation was brought under control," Finnish finance minister Jyrki Katainen told a news conference in Helsinki. "Now we have to do everything we can to bring stability in time."
German finance minister Wolfgang Schaeuble is not attending the meeting, having been taken to hospital in Brussels. It is believed he may have reacted badly to a medication taken yesterday for the first time, the finance ministry said. Interior Minister Thomas de Maiziere will lead the German delegation at the meeting in Mr Schaeuble's place.
The ministers' meeting follows a summit of euro zone leaders on Friday, which asked for a European Stabilisation mechanism to be ready before markets open tomorrow.
t banks and the global economy like the September 2008 collapse of US bank Lehman Brothers have swept through markets this week, pushing global stocks to a three-month low.
Finnish prime minister Matti Vanhanen warned that “no ecomony is safe” if the domino effect begins. If the new EU mechanism did not stabilise the markets, "we may be in a situation where one recession is followed by another", Mr Vanhanen said.
He said the contents of the new arrangement would emerge today. "Whether it contains already a sum of money, a fund, that can be taken into use, or a mechanism, with which the Commission or the Union can itself quickly take a loan, all this will be resolved tomorrow."
Friday's EU summit approved €110 billion in emergency EU-IMF loans to Greece over three years to help it over a budget crisis in exchange for austerity measures so sharp that they have already sparked violent protest.
Two polls released yesterday showed a majority of Greeks support further strikes and demonstrations, though a third showed only 28 per cent backing. Three people were killed in a petrol bomb attack in Athens during mass protests on Wednesday.
Germany's highest court yesterday rejected a request by five academics to block the release of Germany's share of the Greek rescue package, approved by parliament on Friday.