Euro ministers upbeat on Greece, crisis solution

BY AGENCIES

EUROZONE zone finance officials voiced optimism on Friday that a deal to avert a disorderly Greek default was imminent and that key building blocks to resolve Europe's sovereign debt crisis are gradually fitting into place.

Europe's top economic official said an agreement between the Greek government and its private creditors on voluntary losses for bondholders would be complete within days and the euro zone was making progress on strengthening its financial firewalls.

"We are very close to a deal, if not today then over the weekend and preferably in January, not February. We are very close," European Economic and Monetary Affairs Commissioner Olli Rehn told the World Economic Forum in Davos.

The euro strengthened against the dollar and safe haven German bond futures fell back after Rehn's comments. Italy's six-month borrowing costs fell below 2 percent at an auction, their lowest since May, in another sign of easing bond market tensions.

German Finance Minister Wolfgang Schaeuble, speaking on the same panel as Rehn, said crafting a new rescue package for Greece was not easy because of past slippage in its performance, but it would be done in the coming days.

"We don't expect a default in Greece," he said. However, he cautioned that Athens would have to meet commitments to economic and fiscal reform that it had not delivered over the past two years and warned against giving Greece the wrong incentives.

The emerging private sector bond swap deal seems set to leave a funding gap of 12-15 billion euros to bring Greece's debt down to a level of 120 percent of annual output regarded by the IMF as sustainable, EU officials say.

Rehn and Jean-Claude Juncker, chairman of the 17 euro area finance ministers, have both said European governments and institutions may have to increase their support for Greece to make up the difference.

Spanish Economy Minister Luis de Guindos said the European Central Bank should not have to take a writedown on its holdings of Greek government bonds, bought at a discount to calm bond markets, since that could impair its monetary policy.

The ECB's governing council is debating whether and how to contribute to a package for Greece and has not yet taken a decision. ECB sources said the bank opposes taking a haircut to avoid financing governments or setting a bad precedent, but many council members wanted to find a way to avoid making a profit on holding the bonds to maturity when others were taking losses.

MORE FIREPOWER

Rehn said leaders of the 17-nation currency area would decide in the coming weeks whether to combine a temporary rescue fund for countries in difficulty with a new permanent bailout fund to give Europe more financial firepower.

By combining the 250 billion euros left in the temporary European Financial Stability Facility, a planned 500 billion euros of the permanent European Stability Mechanism and an additional 500 billion euros sought by the International Monetary Fund, "you can calculate in which ballpark we are talking."

IMF Managing Director Christine Lagarde, speaking to reporters in Davos, kept up pressure on the Europeans to boost their financial firewalls after making a strong plea in Berlin on Monday.