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European Officials Mull New Approach To End Eurozone Crisis

Greek Finance Minister Evangelos Venizelos

Greek Finance Minister Evangelos Venizelos

European stock markets rose on September 26 amid hopes that EU leaders would consider a new approach.

Reports from the International Monetary Fund's annual meeting in Washington say a multi-trillion-euro rescue deal has been proposed for the eurozone.

The weekend talks produced no specific, comprehensive deal to tackle Europe's debt crisis and stop fallout from Greece's woes from inflicting more damage on the world economy.

But media reports and comments by officials suggest the plan could have three main parts.

One would see a bigger writedown of Greek debt, meaning private investors -- mainly banks -- would have to accept a 50-percent reduction in the value of the Greek debt they hold.

Since that would mean massive losses for those banks, another part of the plan would see a strengthening of several big eurozone banks.

In the third element, some European policymakers are pushing to increase the strength of the eurozone's current bailout fund.

Known as the European Financial Stability Facility (EFSF), the fund was expanded in July to a financing limit of 440 billion euros.

Extra Beef

Olli Rehn, the European Union's finance commissioner, told Germany's "Die Welt" newspaper in an interview published today that European countries may beef up the financial rescue fund beyond that limit.

But there also are concerns that some parliaments of eurozone member states have yet to approve an early agreement reached by European leaders in July that would allow the bailout fund to be enlarged.

Tharman Shanmugaratnam, Singapore's finance minister and chairman of the International Monetary and Financial Committee, let it be known that IMF members during the weekend had vowed collectively to do whatever it takes to deal with a "precarious situation."

"The financial crisis which has Europe as its epicenter requires first and foremost...the adoption [and implementation] of the July 21 agreement of euro area leaders in their respective parliaments," he said.

"Getting that done as quickly as possible -- implementation -- is critical because the EFSF and the use of the EFSF in new and creative ways, which is what the July 21st agreement allows for, is extremely important in creating a firewall within Europe."

Indeed, talks now reportedly are focusing on ways to expand the role of the EFSF beyond its original conception so that it would take on the main part of the risk of lending to governments that now struggle to borrow money on the open market.

Such a move would make it less risky for the European Central Bank to issue rescue loans alongside the bailout fund.

That's because the fund would act as an insurer, using its funds to cover a portion of any losses the ECB might incur on its loans.

The advantage of this plan is that the bailout fund's 440 billion euros feasibly could be enhanced by another 1.5 trillion euros of loans from the European Central Bank -- making about 2 trillion euros available for eurozone governments that have been shunned by the market, like Italy and Greece.

But analysts say such a plan also could be rejected by eurozone member states if they are allowed to vote on the reform. That's because the plan would put much more of the risk on eurozone taxpayers.

In its latest Global Financial Stability Report, the IMF argued that the potential losses for eurozone banks from the sovereign debt crisis could be as high as 300 billion euros.

Cut In Half

Especially hard hit would be banks like Unicredit of Italy -- or the French banks BNP Paribas, Société Générale, and Credit Agricole -- that have purchased large amounts of government bonds from debt-ridden countries like Greece and Italy.

If that were the case, the IMF report says, more than one out of five banks in the eurozone could see their capital resources cut in half.

Reports about the initiative come as debt-strapped Greece enters the final stretch of a crucial fiscal audit by the European Union and the International Monetary Fund. That audit will determine whether Athens will receive an 8 billion euro rescue loan it needs to pay October's bills.

On September 25, Greek Finance Minister Evangelos Venizelos said in Washington that Athens will introduce the new measures to rein in its budget deficit -- a debt crisis that threatens to infect the eurozone and set back the global economy.

Greece announced the wave of austerity measures last week to secure a new injection of aid and save the country from bankruptcy, after inspectors from the EU and the International Monetary Fund made clear they were losing patience with Athens' failure to meet its budget targets set as a precondition .

The Greek parliament is to vote on September 27 on a new property tax that is part of the latest austerity package.

Meanwhile, public anger is building in Greece about the new tax and other austerity measures designed to overcome the skepticism of international creditors.

compiled from agency reports

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