Euro zone finance ministers gave Greece two weeks from Monday to approve further spending cuts and tax increases in exchange for another 12 billion euros in emergency loans, piling pressure on Athens to get its ragged finances in order.
After two days of crisis talks, the ministers effectively issued Athens an ultimatum, saying the Greek government, parliament and broader society had until July 3 to approve a new austerity package that includes privatization measures in order to secure the release of the next tranche of EU/IMF aid.
Greece risks defaulting on its debts if the next tranche, the fifth installment of 110 billion euros ($155 billion) of loans agreed with Athens in May 2010, is not released in time.
The approval of the Greek parliament is absolutely essential and it will have to arrive in a timely fashion so we can take a decision on July 3, said Jean-Claude Juncker, who chairs the Eurogroup of the 17 euro zone finance ministers.
It is clear that the (Greek) debt is sustainable, but the debt will only remain sustainable if Greece fulfills all its commitments which it agreed with the troika, he told reporters, referring to the European Union, International Monetary Fund and European Central Bank.
Finance ministers from the Group of Seven industrialized nations held a second conference call on Monday after discussing on Sunday night the potential impact on global financial markets if Greece were to default.
Both calls were organized by French Finance Minister Christine Lagarde, the favorite to be named as the IMF's new chief this month.
We have a calendar; we have a roadmap, Lagarde told reporters in Luxembourg. Efforts have to be undertaken, in the first place by Greece, which leaves here knowing that it has considerable parliamentary efforts to make.
In Washington, the White House restated its view that the crisis could pose a risk to fragile economic recoveries around the world if it spins out of control, but that the mechanism exists to contain it.
It does create a headwind, and that's why it needs to be resolved for the global economy, said Jay Carney, the presidential spokesman. We believe Europe, working with the Greek government, can resolve it.
Greece's newly appointed finance minister, Evangelos Venizelos, issued a statement shortly before Juncker spoke saying he would strive to ensure the already reworked austerity program was approved, possibly by June 28.
The overriding aim is to develop a clear relationship of trust, to stabilize the situation, to have a disbursement of the fifth installment, Venizelos said. The political time has been compressed a lot. Each day is of extreme importance and hence we cannot afford to waste a single hour.
Shoring up their ability to tackle any further problems in the euro zone, the ministers also rubber-stamped an agreement to increase the effective lending capacity of the current bailout fund, the EFSF, to 440 billion euros by increasing guarantees.
And they said the European Stability Mechanism, the permanent crisis fund that will replace the EFSF from June 2013, would not have preferred creditor status when it comes to loans to Greece, Ireland and Portugal, a change that eased concerns among private creditors about its structure.
ATHENS ON WATCH
In Athens, crowds of anti-austerity demonstrators gathered in the central square outside parliament, but there were no new clashes with police. Power workers began a strike and blackouts were expected in parts of the country.
In parliament, Greek legislators debated the highly unpopular plans, which aim to produce a further 6.5 billion euros in budget savings this year, and 28 billion through 2015, and raise 50 billion euros from the sale of state assets.
On Sunday, Prime Minister George Papandreou appealed to the nation to accept steps that certainly in the short term will make life harder for most citizens.
The consequences of a violent bankruptcy or exit from the euro would be immediately catastrophic for households, the banks and the country's credibility, Papandreou said at the start of a confidence debate on his new crisis cabinet.
While some financial experts in Greece expect protest to die down and the package eventually to be approved, one Greek newspaper on Monday said the EU had treated Greece poorly.
Blaming the stupidity of Europeans, the Eleftherotypia newspaper wrote in an editorial:
Today it's at risk of becoming Europe's little whore. If the euro's 17 members do not understand that to save their economy they must become one federation, the euro will collapse and with it half of its economies.
Inspectors from the EU and IMF will make a further visit to Athens this week -- having just completed an inspection -- to examine changes the country wants to make to the plan, Olli Rehn, the EU's monetary affairs commissioner, said.
In order to impose a deadline on Athens, Juncker said he had already scheduled an extraordinary meeting of euro zone finance ministers for July 3, when the disbursement of the 12 billion euros will be approved -- if Greece keeps its side of the deal.
The euro weakened against the dollar marginally on Monday and the cost of insuring Greek and Italian debt against default rose, a reflection of the increasing risk of contagion across highly indebted euro zone states from Greece's problems.
Ratings agency Moody's said on Friday it could downgrade Italy's Aa2 rating in the next 90 days given concerns Greece's crisis could derail Italy's tepid recovery.
While it seems likely that Athens will eventually get the next tranche, as well as a further emergency loan program of around 120 billion euros up to the end of 2014, the net result is only to buy Greece more time -- the possibility of a debt restructuring in the longer-term, or even default on a portion of its debt, has not gone away.
After their meeting into the early hours of Monday, the euro zone ministers announced that they were ready to put together a second package of loans for Greece, despite the country having missed debt targets in the first package.
The second package, to be outlined by mid-July, will include more official loans and, for the first time, a contribution by private investors, who will be expected to voluntarily purchase new Greek bonds as existing ones mature.
(Additional reporting by John O'Donnell, Daniel Flynn, Annika Breidthardt and Julien Toyer in Luxembourg, and Renee Maltezou and George Georgiopoulos in Athens; Writing by Luke Baker; Editing by Mike Peacock/Ruth Pitchford/Ron Askew/Eric Walsh)