Greece demands more help and Portugal awaits a bailout

As Greece demands more help and Portugal awaits a bailout, the euro zone crisis is creating political turmoil. Bruno Waterfield in Brussels and Philip Aldrick report.

An undercurrent of anger and mistrust will permeate tonight's critical meeting of euro zone ministers in Brussels as they grapple with a spiralling Greek debt crisis and try to seal a €78 billion ($104 billion) bailout for Portugal. As if the euro's problems were not enough, seething resentments will add a new political dimension to the talks.

The inclement mood was set 10 days earlier. On May 6, Jean-Claude Juncker, Luxembourg's Prime Minister and chairman of the euro group of single currency members, called a secret meeting of the European Union's most powerful countries at the Chateau de Senningen on the outskirts of the tiny Duchy state.

Gathered at the 18th century former paper mill were finance ministers from Germany, France, Italy and Spain - the euro's G20 members, Jean-Claude Trichet, the president of the European Central Bank, and Olli Rehn, the EU commissioner for monetary affairs.

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Top of the agenda was the fate of Greece, after the International Monetary Fund - on the hook for €30 billion of the €110 billion rescue - demanded that the EU come up with a new strategy as Greece continued to plunge into debt and recession.

Sparking rumours that Athens was set to leave the euro, George Papaconstantinou, the Greek Finance Minister, was summoned to explain how his country could take further savage austerity measures and speed up privatisation of lucrative state-owned industries.

As news of the meeting leaked out, financial markets sent the euro into a nosedive. In a desperate bid to end the turmoil, Mr Juncker, who had not informed other euro zone finance ministers of the meeting, chose to lie. ''I totally deny there is a meeting,'' said his spokesman, as speculation mounted.

Mr Juncker had already horrified many of his counterparts by bragging last month that he often ''had to lie'' to suppress public debate over euro zone economic policies which, he claimed, were too important for open contemplation.

''I am for secret, dark debates,'' he said. ''When the going gets tough, you have to lie.''

The lies and the elite gathering sparked a furious response from euro members, as MPs in national parliaments demanded an explanation of what was going on. Gunther Krichbaum, the chairman of the Bundestag's powerful European scrutiny committee, said that he had been ''shocked and dismayed'' at Mr Juncker's deceit.

''That does not create trust on decision-making. That is a very serious mistake, because trust is important,'' he said.

Mr Krichbaum, a senior German MP and member of Angela Merkel's ruling Christian Democrats, warned that conspiracies to deceive the public over bailouts and elite meetings threatened to destroy the euro. ''If we don't pay attention to this then Europe will fall apart,'' he said.

Diplomats from smaller member states, excluded from the talks, accused the big euro countries of playing ''ham-fisted cloak-and-dagger games''. ''Acting like this is almost guaranteed to create crisis, and these are the people in charge. There are going to be some very angry people around the table demanding what the hell are they playing at,'' said an official from a non-G20 euro zone country.

The mistrust, disarray and bitterness could not have come at a worse time, as problems multiply for the euro zone. The Senningen meeting was sparked by heated words at last month's IMF summit in Washington, where the US and Canada demanded assurances that IMF's loans for Greece, Ireland and Portugal would not be wasted. With Greece due to be assessed for a fifth, €3.3 billion tranche of the IMF loan in June, they wanted assurances that the fund was not about to throw good money after bad.

For the IMF, it has been an unusually hands-off process. A typical IMF program consists of a three-pronged remedy: fiscal consolidation and structural reform, debt restructuring, and a currency depreciation. The principle is to create a more competitive economy, while trimming the debt burden.

A falling currency makes the country more competitive, an effect that is augmented by structural reforms such as pay cuts, as happened in Ireland.

However, IMF officials have had their hands tied in Europe. Brussels controls currency and debt. Tweaking the other alone just kills off demand and risks recession, which in turn makes it more difficult to improve the public finances. Greece is a case in point. It is expected to contract 3.5 per cent this year - a European Commission estimate - and last week it revealed it had fallen €313 million short of its target deficit reduction for the first quarter.

Although it cut spending by more than planned, tax receipts suffered a €1.28 billion shortfall ''mainly due to the larger than projected recession'', the Ministry of Finance said. Worse still, the IMF, which is carrying out an assessment of Greece with the EU, is said to be concerned that interest rates on Greek borrowing, at about 13 per cent, are putting the country in an impossible situation.

Athens cannot afford to refinance its €330 billion of sovereign debt at those levels, so it will either become wholly dependent on bailout money or suffer a massive default. Neither is a viable option.

The IMF-EU report on Greece, due to be completed last week and expected to make grim reading, will be used to decide next month whether Athens can no longer comply with the conditions for IMF funds. The answer is expected to be negative, which is why a second rescue is now being discussed.

So severe are the problems that euro zone ministers - including Wolfgang Schauble, Germany's Finance Minister - are contemplating how to restructure Greek debt, fully aware of the risk of financial market turmoil from fears that Ireland and Portugal would also be unable to pay back loans.

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