The decision on new loans follows a video conference overnight between US President Barack Obama, British Prime Minister David Cameron, and the key eurozone duo of German Chancellor Angela Merkel and French President Nicolas Sarkozy.
Late Thursday the Greek parliament approved a controversial government list of even tougher austerity measures demanded by the country's creditors that has sparked two days of street violence. But Prime Minister George Papandreou warned the EU leaders beforehand: "I am sounding the alarm against more delays" in Brussels.
EU finance, foreign and prime ministers are gathering in the Belgian capital over the weekend to agree ways of ramping up the eurozone rescue fund to cover not only Greece, but Italy, the third-biggest eurozone economy.
The European Financial Stabilty Facility, EFSF, currently has a limit of 440 billion euros with which to rescue nations in trouble but would need much more if it had to throw a lifeline to strugglers such as Italy or even Spain, Europe's third and fourth largest economies.
Meanwhile, rifts between France and Germany, the EU’s two powerhouses, are delaying efforts to stem global fallout from the crisis
France had been pushing for the EFSF to morph into a bank that could borrow from the European Central Bank to help those in need.
Berlin is opposed to this on the grounds it would entail changing the EU's founding treaty, a potentially long and painful ratification process. Differences also exist over how much to boost the fund's capacity, to somewhere between one and two trillion euros.
Eurozone financial crisis
European leaders and ministers head into marathon weekend talks in Brussels on Friday aimed at finding a way of stemming global fallout from the financial crisis in the eurozone. Issues on the agenda include.
- Solving the Greek debt crisis - Eurozone finance ministers are set to unlock an eight-billion-euro tranche of aid to Athens, but this sixth slice of aid from a EU-IMF bailout package agreed in April 2010 is already insufficient to help the debt-wracked country. Differences have also emerged between the IMF and the EU over Greece. The IMF believes the European view of the Greek economy is too favourable
- How best to maximise the efficiency of the bailout fund, the EFSF - Discussions are underway on how to ‘leverage’ the fund. This means increasing its lending capacity without increasing the size individual governments will guarantee. German Chancellor Angela Merkel is finding it difficult to sell the idea of increasing the fund to politicians back home. After leveraging, the fund could be worth at least a trillion euros which the EU hopes will restore confidence on financial markets.
- Should EU banks be recapitalised? - In July, the EU agreed fresh loans to Greece which would be financed by private sector banks and investment funds agreeing to a voluntary 21 per cent write-down or ‘haircut’ on their holdings of Greek debt. To deal with the losses this would entail, the EU wants lenders to shore up their reserves so the ‘Greek crisis’ does not become a ‘bank crisis’. This means increasing core cash reserves to nine per cent. Eurozone banks are unhappy at the idea of forced recapitalization. The European Banking Authority estimates that between 80 and 100 billion euros is needed to restock banks’ capital bases.