Containing Greek debt crisis is top priority: analysts

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Europe has survived another week of Greece's debt saga but must decide on new loans to Athens and take care that potential remedies do not kill the patient or its neighbours, analysts say.

"We need to limit as much as possible the amount of contagion that would arise from radical action on Greece," Deutsche Bank economist Gilles Moec told AFP after days of what seemed sometimes like brinkmanship by European leaders.

He urged that Athens be allowed to make its case for a round of aid worth 12 billion euros ($17 billion) from the European Union and International Monetary Fund while countries like Ireland and Portugal work to "decouple from Greece and reduce market pressure."

Investors had plenty to digest meanwhile, with warnings that the IMF might not approve its share of the aid, that the Netherlands would not approve further help in that case and that Greek bonds might no longer qualify as collateral for European Central Bank loans.

Greek Prime Minister George Papandreou warned the country will "most likely" go bankrupt without the next aid installment while Finance Minister George Papaconstantinou said "no wages, pensions or state obligations will be paid" without the money.

Greek finance ministry data shows a treasury bill worth 2.4 billion euros maturing on July 15.

The EU, IMF and ECB are pressing Greece to step up a privatisation programme and get all political parties to approve more austerity and reform measures that have sparked violent protests but emergency talks called by the president on Friday failed to make any headway.

A troika EU, IMF and ECB officials experts are in Greece now reviewing its progress on its May 2010 bailout programme, and must report soon on whether to grant the next loan funds.

Jean-Claude Juncker, head of the Eurogroup of finance ministers, warned Thursday that the IMF might block its aid unless the Greek government can show it can remain solvent for the next 12 months.

"There are specific IMF rules and one of those rules says that the IMF can only take action when the refinancing guarantee is given over 12 months," Juncker said.

Juncker and others have said they could consider extending the repayment period on Greek bonds, giving the government some breathing room, if officials showed they were getting to grips with the country's problems.

Greece is under immense pressure owing to public debt that has swollen to 340 billion euros.

Athens benefits from an EU-IMF rescue plan worth 110 billion euros but analysts say it will need 60 billion euros more to make it through 2012, when it has a payments schedule of 66 billion euros according to Papaconstantinou.

"There are things that need to be done immediately," Moec said.

"The new loans to Greece, we need to have clarity on this, and probably also on an additional strategy" to reduce the debt.

Calls to extend the repayment schedule have met with a flat refusal from the ECB, which holds about 40 billion euros worth of Greek bonds and warns that a so-called "reprofiling" of the debt would cause investors to flee the country.

ECB chief economist Juergen Stark, governing board member Jens Wiedmann and others warn the central bank would no longer be able to accept Greek debt as collateral, a dire threat since that could push institutions into bankruptcy.

The Greek financial sector could collapse and "in a worst-case scenario, uncertainty about who was most exposed to Greece might even prompt the region's interbank lending markets to seize up," Capital Economics economist Ben May warned.

A similar situation was seen worldwide after the US investment bank Lehman Brothers collapsed in September 2008.

"What's more, a voluntary reprofiling may increase worries that other peripheral governments will try to restructure their debt too, rather than accept years of austerity," spooking anyone who holds debt issued by bailed-out Ireland and Portugal, he added.

Moec discounted ECB warnings on Greek bonds however, saying: "There are limits to their position as long as what's on the table is reasonable and not too disruptive from a global market point of view.

"The final costs for public finances throughout the eurozone of letting Greece go would probably far exceed the cost of continuing with the programme, provided there are some efforts from the Greeks" and participation by the private sector, he said.

© 2011 AFP

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