Europe delays decision on Greece, presses Athens to act

By Dan Flynn and Mike Winfrey

LUXEMBOURG/ATHENS (Reuters) - Euro zone finance ministers kept up intense pressure on Greece on Monday, saying it had to approve tougher austerity measures before a final decision is made on a further 12 billion euros ($17 billion) in loans.

Meeting into the early hours of Monday, ministers indicated that the next tranche of EU/IMF aid would be paid by mid-July, allowing Athens to avoid default, but said it was up to Greece to show concrete progress on plans to cut spending, raise taxes and generate other revenue streams first.

"We are increasing the pressure because there are precedents," he said, referring to Greece's not meeting commitments in the past and falsifying statistics. "We have to be sure that everyone is going to support the plan."

In Athens, anti-austerity demonstrators gathered in the central square outside parliament, but there were no new clashes with security forces. Power workers began a strike and blackouts were expected in some parts of the country later in the day.

In parliament, legislators are debating the highly unpopular plans to cut spending, further increase taxes and privatize state assets, measures already agreed with the EU, IMF and the European Central Bank to bring finances back into line.

On Sunday, Prime Minister George Papandreou asked Greeks to support the austerity steps and avoid a "catastrophic" default, appealing for the nation to accept deeply unpopular tax hikes, spending cuts and privatization plans.

"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.

Inspectors from the EU and IMF will make a further visit to Athens this week -- having just completed an inspection -- to meet the new finance minister and examine some of the tax measures, Greek government officials said.

Euro zone ministers seemed intent on delivering a message of tough love to Athens, which agreed a 110 billion euro program with the EU in May last year and is expected to get a second package worth as much or more before long.

The fifth tranche of the first program -- the 12 billion euro payment -- is due in July. Without it, Athens has warned that it could default on its debts, an event that would could wreak havoc on global markets and threaten other European sovereigns and banks.

"Greece itself must create the conditions so that the next tranche can be paid out as agreed. That's due in July. It is Greece's responsibility that we're having difficulties now," German Finance Minister Wolfgang Schaeuble said of the next tranche payment.

While it seems likely that Athens will eventually get the next tranche, and a further emergency loan program of around 120 billion euros up to the end of 2014 will also be agreed, 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.

The euro weakened slightly against the dollar on Monday and the cost of insuring Greek and Italian debt against default rose, reflecting concerns about potential contagion to other states on the euro zone periphery.

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.

PRIVATE SECTOR ROLE DEBATED

In a statement issued after a seven-hour meeting in Luxembourg that ended in the early hours of Monday morning, the euro zone finance ministers also announced they would put together a second bailout of Greece, which missed debt targets in the first rescue plan by big margins.

To be outlined by mid-July, it will include more official loans and, for the first time, a contribution by private investors, who will be expected to maintain their exposure to Greece's sovereign debt market through voluntary purchases of new bonds as existing ones mature.

The statement did not say how large the new bailout would be, or give details of the private sector contribution beyond describing it as "substantial."

Euro zone officials have told Reuters the new plan is expected to fund Greece into late 2014 and feature up to 60 billion euros of fresh official loans, 30 billion euros from the private sector, and 30 billion euros from Greek privatization proceeds.

In an attempt to win the cooperation of the European Central Bank, which opposes any scheme that would cause credit rating agencies to declare Greece in default, the ministers said the private sector debt rollover would avoid even a limited or "selective" default.

They did not say how this would be achieved.

Discussions with private sector creditors -- European banks, pensions funds and other investors in Greek bonds -- have already begun, but Germany's Schaeuble indicated that there was still some way to go before there is wide agreement on how they will be voluntarily involved and to what extent.

"We have to talk about that now, with all the institutions involved," he said on Monday. "It's a fine line. On the one hand it has to be voluntary, because otherwise there will be consequences, but on the other hand it must also lead to a result. We will continue to work on that."

(Additional reporting by John O'Donnell, Annika Breidthardt and Julien Toyer in Luxembourg, and Renee Maltezou and George Georgiopoulos in Athens; Writing by Luke Baker; Editing by Mike Peacock)