EU Commission urges Europe to act on Greece

Wed Oct 12, 2011 1:15pm EDT
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By John O'Donnell and Jan Strupczewski

BRUSSELS (Reuters) - Europe needs to take decisive action on Greece, the head of the EU's executive said on Wednesday, outlining a broad plan to contain the crisis threatening the euro as officials said banks faced heavier losses on their holdings of Greek debt.

The warning, delivered by Jose Manuel Barroso, President of the European Commission, is intended to galvanize France and Germany, the bloc's main powers, into action when they meet on October 23 under international pressure to limit the damage the debt crisis risks inflicting on the world economy.

"Doubts and uncertainties over Greece's future jeopardize stability in the entire euro area and beyond," said Barroso. "The time has come to remove these doubts."

The head of the EU's executive outlined a five-point proposal to tackle the economic crisis, spanning higher capital hurdles for banks and extra powers for the Commission to intervene in national budget setting.

Although he has no power to introduce such measures himself, his view is influential and keeps pressure on German Chancellor Angela Merkel and French President Nicolas Sarkozy who have promised a deal to stabilize the euro zone this month.

A key part of that plan will be to strengthen banks against losses on Greek loans. Officials said on Wednesday that countries will ask banks to accept losses of up to 50 percent -- far more than the 21 percent proposed in July.

But Europe's banks need protection, in the form of extra capital, from the fallout of such a move.

Central to Barroso's proposal, which needs the backing of EU member states, is the early introduction of the European Stability Mechanism (ESM) to replace the temporary EFSF bailout scheme by mid-2012 -- an idea originally put forward by Germany.   Continued...