Amid growing political unrest in Greece and escalating protests against the government's austerity measures, the European Union has postponed a decision on a second multi-billion euro rescue package for the debt-ridden nation at least until mid-July.
However, the European Commission, the executive arm of the 27-nation EU, said on Thursday that a bankruptcy will be averted by releasing the fifth tranche of 12 billion euros from last year's bailout package of 110 billion euros ( USD 159 billion) when euro zone finance ministers meet in Luxembourg over the weekend.
This will help prevent Greece defaulting on its debt repayments due next month and ensure that it will remain solvent until September, EU Commissioner for Monetary Affairs Olli Rehn said.
He proposed that the euro zone nations decide on a second rescue package for Greece at the meeting of their finance ministers on July 11. "Thereby, we can avoid a credit default scenario and clear the way for a medium-term strategy," he said in a press statement in Brussels.
He called upon the euro zone finance ministers to overcome their "remaining differences and to reach a responsible agreement at this critical juncture." The EU decision came as Greece's embattled Prime Minister George Papandreou struggled to form a new Cabinet and to win Parliament's support for new austerity measures, which sparked strikes and protests.
Germany is reported to have asked for deferring a decision on a second rescue package for Greece until September to win the support of all EU partners for its highly contentious proposal to involve private creditors in the
bailout after the euro zone finance ministers could not narrow down their differences on this issue at their meeting in Brussels on Tuesday.
But Greece, Ireland and Portugal, the three euro zone nations which received a bail-out from the EU and the IMF, as well as Spain, Italy and Belgium, have voiced their opposition to the German proposal.
They are pressing for a decision latest by mid-July, warning that by prolonging their discussions, the euro zone nations will not only increase the nervousness in financial markets, but would also contribute to a contagion, media reports said.
Germany's proposal to delay a decision on a second financial rescue package for Greece has added a new dimension to the dispute among the euro zone partners on how to tackle the debt crisis in Greece, which lingered on even after it received a 110 billion euro bailout from the EU and the IMF in May last year and is threatening once again to engulf the entire euro area.
A second rescue package ranging between 90 billion and 120 billion euros has become necessary after tough austerity measures implemented by the Greek government in return for the EU-IMF aid failed to stabilise the economy.
Greece's national debt has soared to a staggering 350 billion euros, its budgetary deficit has widened, unemployment has risen to around 16% and economic growth has stagnated at around 0.2%.
At the same time, the austerity measures, which included tax increases, job cuts in public services, salary reductions and freezing of pension, sparked off nationwide protests while the EU and the IMF demanded more efforts from the Greek government to reduce expenditure and stabilise the economy.
Several EU nations, including France and the European Central Bank, have opposed Germany's proposal to involve private creditors in the next rescue package planned for Greece because they fear their banks with huge investments in Greek bonds will lose heavily on the "soft debt-rescheduling"
proposed by Germany as part of the package.
Under the German plan, banks, investment funds and insurance firms will be asked to exchange their Greek government bonds, which are maturing, for new bonds having a maturity of seven years.
Germany hopes that this will give cash-strapped Greece more time to pay back its debts and to bring its finances under control. Involving private creditors in the second rescue package for Greece is very crucial for Chancellor Angela Merkel's government to win broad political support for this highly unpopular plan.
Public support for the euro zone bailout has been dwindling among the German public since the rescue of Greece, Ireland and Portugal and the latest opinion polls showed that over 60% of those questioned rejected a second bailout of Greece.
There are also deep differences within Merkel's Centre-Right coalition over the new aid package for Greece, even though the coalition last week voted for a resolution endorsing EU negotiations on the planned bailout.
Merkel's junior coalition partner, the Free Democratic Party (FDP), had demanded the involvement of private creditors in the bailout as a condition for its support. Chancellor Merkel and French President Nicolas Sarkozy
are expected to sort out the Franco-German differences over involving the private sector in the second rescue package for Greece and delaying a decision on that until September when they meet in Berlin on Friday.
France and other countries opposing the German proposal argue that their banks should be involved on a voluntary basis in a "soft debt rescheduling". So far, only the Netherlands and Finland have sided with Germany.
