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Greek Minister of Finance Evangelos Venizelos speaks during a conference in Athens, Monday, Sept. 19, 2011.


European policy makers are rushing to protect the continent's banking system and other teetering economies from the fallout of any Greek bankruptcy, as the long battle to save Athens enters a critical stage.

As Greece's cash reserves quickly dwindle, the country is in dire need of more bailout money. The Greek government is almost certain to get the next instalment of its rescue money, but with great reluctance on the part of European officials. They're frustrated by Greece's lack of progress on the austerity front, but they fear the consequences for the rest of the euro zone and the region's banks aren't worth the enormous risks of cutting Greece loose now, analysts say.

Greece is close to a deal for the next chunk of bailout funds, a Greek Finance Ministry official said Monday after a conference call with officials from the European Union, the European Central Bank and the International Monetary Fund, the troika policing Greece's efforts to meet the tough conditions demanded in exchange for the money.

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Finance Minister Evangelos Venizelos vowed that the government would impose as much austerity as needed to keep the rescue taps open. But the crisis has reached what some analysts regard as the tipping point, because Athens has been unable or unwilling to deliver on all of its previous promises to rein in a runaway budget deficit.

Markets tumbled again Monday as investors focused on Greece's woes. Benchmark stock indexes in Europe dropped between 2 and 3 per cent, while European government and corporate bonds also sank along with the euro.

And in another sign that Europe's debt woes are spreading, Standard & Poor's cut its ratings on Italian government debt by a notch to single-A, citing Italy's weakening economic outlook.

European policy makers are concerned with stabilizing the financial system and the rest of the euro zone., particularly such major economies as Italy and Spain, analysts say. The goal has long been to buy time while other struggling economies right themselves and bank balance sheets can be shielded from the damages of a Greek default.

Officials in Washington and other world capitals expressed fears over the potential impact of an unravelling in Europe on the global financial system and the stalling world economy.

Brazil is set to propose that it and other major emerging nations contribute billions of dollars of new funds through the IMF to ease the European crisis, a Brazilian official told Reuters.

But markets and most observers have already concluded a Greek default is inevitable. It's just a matter of when. "That's the only way that we're going to get a concrete way of taking this thing forward," said Simon Ballard, senior credit strategist with RBC in London. "End the procrastination and do something definitive."

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In the meantime, though, the ECB has teamed up with the U.S. Federal Reserve and other major central banks to avert a U.S. dollar liquidity crisis faced by euro zone banks. The ECB itself has been shoring up battered banks in Greece and elsewhere with badly needed capital and it has been buying government bonds on the secondary market to try to maintain a semblance of order in the debt market.

But the debt market problems worsened Monday after the latest emergency meeting during the weekend of euro-zone finance ministers and central bankers failed to make any headway on Greece.

Now, to stave off default, Athens is being forced to move even more aggressively on the austerity front. Before its rescuers free up the next €8-billion slice of a €157-billion loan by mid-October – when billions in debt repayments fall due and when the government says it will be out of cash to meet pension, salary and other obligations – the government must force its embattled citizenry to accept even more pain.

"The ball is in the Greek court. Implementation is of the essence," IMF official Bob Traa said.

Mr. Traa cited the need to speed up or impose 15 austerity measures designed to produce faster cost savings and more effective tax collection.

Greek media reports indicate the list includes shedding 20,000 more state workers, reducing or freezing salaries and pensions, increasing a heating oil tax, shuttering money-losing state companies, cutting health spending and picking up the pace of privatizations.

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The European Commission insisted it is not calling for any cuts not previously accepted by Athens as part of its mid-year budget overhaul. "What is on the table is full compliance with the agreed targets," Commission spokesman Amadeu Altafaj said in Brussels.

Athens narrowly averted bankruptcy in June, after European officials threatened to block a €12-billion payment unless Prime Minister George Papandreou passed additional austerity measures, including more cuts, tax hikes and the privatization of dozens of public companies. Mr. Papandreou managed to push the legislation through a divided parliament in the face of fierce union opposition and violent street demonstrations.

The Greek economy is expected to shrink 5.5 per cent this year and 2.5 per cent in 2012.

Former IMF managing-director Dominique Strauss-Kahn said in a French TV interview Sunday that Greece's debt has to be slashed and that government and private creditors should take losses now rather than continue trying to buy time.

"[EU]governments are not solving things, they are kicking the problem down the road, and the snowball is growing and making the problem bigger and bigger," he said.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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