Greece debt plan 'playing with fire' says eurozone head

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Riot police and protesters in Athens, Greece (15 June 2011)
Image caption,
Greece's austerity campaign has led to angry protests on the streets of Athens

The Greek debt crisis is endangering the economies of at least five other EU countries, the head of the eurozone group of finance ministers has warned.

Luxembourg Prime Minister Jean-Claude Juncker said Germany was "playing with fire" with a plan to involve private creditors in resolving the crisis.

Eurozone finance ministers are set to release 12bn euros (£10bn) in loans later on Sunday.

PM George Papandreou confirmed talks over a second bail-out are going on.

The 12bn-euro loan is the latest tranche of an EU and IMF aid package, agreed in May last year, worth a total of 110bn euros.

Speaking on Sunday at the start of three days of debates, Mr Papandreou said that Greece was in talks for a new bail-out "roughly equal" to the first package, and called for a referendum in the autumn on "changes to the political system", including to the country's constitution.

Mr Papandreou asked parliament to support the new cabinet, saying Greece was giving the impression it was divided over the financial reforms, which was not helping its economic situation.

MPs will vote on a confidence motion on Tuesday after Friday's cabinet reshuffle saw former Defence Minister Evangelos Venizelos replacing George Papaconstantinou in the finance ministry.

The move sparked a jump in Greek bank shares but failed to ease the anger on the streets.

Greece needs the 12bn-euro IMF and EU loan to avoid defaulting on its debts due for repayment over the next few months.

But the money is conditional on the government implementing a series of painful domestic reforms which have sparked nationwide strikes, rallies and violent riots on the streets of the capital.

German Chancellor Angela Merkel has said that private investors should be encouraged to share some of the burden of the Greek debt by allowing the country extra time to pay them off.

'Wrong signal'

Mrs Merkel and French President Nicolas Sarkozy have stressed such involvement should be voluntary, but that private creditors should "show solidarity".

But Mr Juncker told German paper the Suddeutsche Zeitung on Saturday that this proposal was "playing with fire" as it would send the wrong signal to ratings agencies who could then decide Greece had defaulted on its repayments.

If Greece were to default, the cost of borrowing would rise for other struggling eurozone countries, forcing them to default in turn.

Mr Juncker said that unless properly managed, the crisis "could prove contagious for Portugal and Ireland, and then also for Belgium and Italy because of their high debt burden, even before Spain".

He said Mrs Merkel's proposal was based on "domestic political considerations in Germany".

Separately on Sunday, the president of the European Central Bank criticised eurozone policy makers for poor governance.

"Governance of the economic union is insufficient," Jean-Claude Trichet told an audience in the German city of Kiel.

Finance ministers from eurozone countries are due to meet in Luxembourg later on Sunday, where they will almost certainly release the next 12bn-euro loan which has already been promised to Greece as well as discussing a second bail-out package.

But the BBC Chris Morris in Athens says many people doubt whether that will be enough to save the country's economy.

Thousands of protesters marched on the Greek parliament on Saturday to show their continued anger at Prime Minister George Papandreou's austerity campaign which would see significant cuts to public services and sell off state enterprises.

"They, along with the creditors, have decided to skin the Greek people alive," said Aleka Papariga, head of the Greek Community party.

"The struggle will continue until the end."

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