Euro ministers fail to clinch deal on Greek aid (Reuters)

BRUSSELS (Reuters) – Euro zone ministers failed on Tuesday to reach agreement on how private holders of Greek debt should share the costs of a new bailout, putting the onus on the leaders of Germany and France to forge a deal later this week.

Nervous markets pushed the bond yields of Greece, Ireland and Portugal to their highest levels since the introduction of the euro in 1999 amid uncertainty over a second rescue for Athens and the contribution governments are likely to demand from the private sector.

European paymaster Germany, backed by the Netherlands, wants the banks, pension funds and insurance firms that hold Greek debt to swap their bonds for new ones with maturities that are seven years longer.

This would buy Greece more time to chip away at its massive 330 billion euro ($477 billion) debt mountain and limit the amount of taxpayer-funded aid Athens would receive. But ratings agencies have warned they would view this as coercive and label it a default.

Fearful that Berlin's plan could unleash a new wave of contagion, the European Central Bank, European Commission and France are pushing for a softer solution in which bond owners would be encouraged, probably by incentives, to buy new Greek debt as their holdings matured.

"There has been no result," German Finance Minister Wolfgang Schaeuble told reporters after talks in Brussels ended late on Tuesday.

Schaeuble's counterpart from Luxembourg, Luc Frieden, said ministers had narrowed their differences and their goal remained to seal an agreement later this month.

"We have to be very careful that this is not considered to be a 'credit event', to be very careful that this does not lead to a rating downgrade. It's only under these strict limitations that we can move toward private sector involvement," he said.

Discussions within the so-called Eurogroup were due to continue on Sunday evening in Luxembourg, ministers said.

To avert financial disaster for Greece, the bloc must forge a compromise by a June 23-24 EU summit.

But investors will be closely watching a meeting in Berlin on Friday between Chancellor Angela Merkel and French President Nicolas Sarkozy, where the outlines of a final deal could be sketched out.

DEAUVILLE DEAL

Merkel and Sarkozy have forged compromises on several contentious issues since the bloc's debt crisis erupted in late 2009, notably a controversial deal sealed last year on the beach in Deauville, France which spelled out for the first time that investors would be asked to shoulder the costs of future euro zone bailouts from mid-2013.

Since then opposition to taxpayer-funded rescues has grown, especially in northern European countries like Germany, Finland and the Netherlands, forcing leaders to consider pursuing soft forms of debt restructuring even sooner, despite repeated warnings from the ECB.

"Somebody has to concede ground over the coming days or the region will experience a full-blown financial crisis," said David Mackie, an economist at J.P. Morgan.

"Given that the Germans and the French are on opposite sides in the restructuring debate, if the two leaders can reach a compromise then it will carry for the region as a whole."

In a sign of just how far worries about the euro zone have spread, China's central bank used its annual financial stability report to sound one of its starkest warnings yet about Europe's debt mire, saying rescue measures had failed to tackle the root causes of the crisis.

"There is a possibility that the sovereign debt crisis will spread and deteriorate," the report said.

The European Union and International Monetary Fund bailed out Athens to the tune of 110 billion euros ($160 billion) just over a year ago, and followed up with similar packages for Ireland and Portugal.

A new rescue is now being thrashed out for Greece as it continues to sink under a debt pile that totals roughly 150 percent of its annual output.

Officials in Brussels say the new deal would keep Greece funded through 2014 and total about 120 billion euros, comprising 60 billion euros in new EU/IMF aid and an equal amount from a combination of privatization receipts and private sector contributions.

VIENNA INITIATIVE

Mario Draghi, who is due to take over as president of the ECB later this year, reiterated at a European Parliament hearing that the central bank remained opposed to any private sector solutions that contained any element of compulsion.

But he signaled the ECB could accept a debt rollover based loosely on the "Vienna Initiative" in which foreign banks agreed, at the height of the global financial crisis in 2009, voluntarily to maintain their exposure to central and eastern Europe.

"There are basically two initiatives that are under discussion. One is the Vienna Initiative, which to me looks entirely voluntary," Draghi said. "Another one is a debt exchange, which I haven't understood whether it is voluntary or it could end up being involuntary."

Standard & Poor's downgraded Greece on Monday, making it the lowest-rated sovereign borrower in the world.

The Greek government is trying to push through new austerity measures worth some 6.5 billion euros for 2011 alone, almost double the belt-tightening already agreed for this year.

But Prime Minister George Papandreou suffered a blow on Tuesday when two ruling party lawmakers said they would vote against the measures.

Protesters have said they will cordon off parliament to prevent deputies from debating the plans on Wednesday and unions are vowing to bring the country to a standstill with a national strike.

(Additional reporting by Jan Strupczewski in Brussels and Michael Winfrey, Lefteris Papadimas, Harry Papachristou and George Georgiopoulos in Athens)

(Writing by Noah Barkin, editing by Tim Pearce)

Somali militants claim minister's killing (AP)

MOGADISHU, Somalia – Somalia's al-Qaida-linked militant group on Saturday claimed responsibility for an explosion that killed the country's interior minister, and said they did so because the minister was "an obstacle" to its endeavor to topple the struggling government.

Al-Shabab spokesman Sheik Ali Mohamud Rage said at a press conference in the capital, Mogadishu, that militants would continue their attacks against top officials until they defeat the government of the Horn of Africa nation. Somalia has not had an effective government for two decades.

Interior Minister Abdishakur Sheik Hassan was killed Friday in an explosion in his home, and a female relative was suspected of being the bomber.

The attack followed a Thursday threat from al-Shabab that it would carry out "brazen attacks deep inside enemy territory," a reference to government-controlled areas of the capital.

Rage did not explicitly say whether the woman, whose body was found on the scene, was behind the attack, but said blame should not fall on women and children. He thanked insiders who he said helped the attack. He did not elaborate.

Hassan's official burial was expected to take place Saturday in the capital, Mogadishu.

Government forces and African Union peacekeepers in the capital on Saturday said they are beefing up security measures to prevent further attacks.

Ministry of Information spokesman Abdifatah Abdinur said security agents are "alert more than they used to be," and that "people are going through extra screening.

"If they used to be screened once in the past, today they are being frisked twice," he said.

Maj. Paddy Ankunda, spokesman for the African Union peacekeepers backing Somalia's fragile government, also said the force is on high alert.

"We know that they're planning to conduct more attacks," he said of al-Shabab militants, urging the public to be extra vigilant. "Our forces are on high alert for any possible suicide attacks."

Violent protests against an agreement calling for the ouster of the country's popular prime minister left at least two people dead on Friday.

For a country that has been swept by war and anarchy for two decades, Friday was a particularly bloody day and came barely two days after President Sheik Sharif Sheik Ahmed and the speaker of parliament signed an internationally mediated agreement extending the government's term by a year. It postponed an August presidential election until 2012 to give leaders more time to deal with security and political issues.

The government once controlled only a couple square miles (kilometers) near Mogadishu's seaside airport. African Union officials who have thousands of troops in the country shoring up the government say they now control half the city after they launched a major offensive at the beginning of the year.

But the militants appear to be fighting back after they lost key positions in the capital, and also after they suffered setbacks in other parts of the country.

Al-Shabab uses suicide bombers to demoralize the government and their African backers.

In 2009, the militants killed National Security Minister Omar Hashi Aden at a time he was preparing a multi-pronged offensive to drive them out of major towns in the country.

And several months later, the militants carried out suicide attacks on African Union base in the capital, killing more than 20 people, including 17 peacekeepers.

Greek ministers approve new austerity measures (AP)

ATHENS, Greece – The Greek Cabinet on Thursday approved and submitted to Parliament a new round of painful austerity measures and a euro50 billion ($73 billion) privatization drive that are essential for the debt-ridden country to continue receiving funds from its international bailout.

Greece is lagging behind with reforms promised in return for last year's euro110 billion ($160 billion) package of rescue loans from its European partners and the International Monetary Fund. Fellow eurozone governments have warned that if the country does not enforce new austerity, it will be cut off from aid.

Without the next euro12 billion installment from its rescue loans due in July, Greece, which remains stuck in recession and locked out of international bond markets, will default on its massive debts.

Finance Minister George Papaconstantinou said the plans were submitted to Parliament shortly after their approval.

"The medium term framework includes interventions to achieve a deficit of 7.5 percent of GDP (gross domestic product) in 2011, and broader interventions to reduce the deficit below 3 percent of GDP by 2014, and around 1 percent for 2015," he said. "It also advances the broader privatization program."

No specific date has been set for a vote, but Cabinet officials said they expected it to be held before June 28.

The governing Socialists hold a six-seat majority in the 300-member legislature, but many party backbenchers have strongly criticized the new austerity plan — which follows a series of pension and salary cuts last year, accompanied by increases in taxes and retirement ages.

However, none of the disgruntled Socialist lawmakers have openly threatened to vote against the measures.

Once the package is approved, the government will table supplementary legislation on its precise implementation. Officials say both pieces of legislation must be ratified before Greece can receive the next installment of the EU and IMF loans.

The new plans include a remedial euro6.4 billion ($9.4 billion) package of cuts and tax hikes for this year, a renewed euro22 billion ($32.15 billion) austerity drive for 2012-2015 and the privatization program. Officials said all Greeks earning more than euro8,000-10,000 annually will be charged an extra tax worth up to 3 percent of their income every year for the next four years, while the sales tax on restaurants and bars will increase to 23 percent from the current 13 percent.

Civil servants and pensioners will suffer more income cuts, while health, education, defense and social spending will be further curtailed.

"We have sought and we have found the fairest possible solution" in the new austerity cuts, Prime Minister George Papandreou said, according to another Cabinet official who was reading from a text of the premier's remarks.

Eurozone finance ministers meeting in Brussels on June 20 and EU leaders gathering on June 23-24 are to discuss Greece's situation.

"We expect the Greek parliament to approve the measures put forward by the Greek authorities in the last review of the troika, so that the euro area finance ministers can take this into account when they decide on the next disbursement," Amadeu Altafaj-Tardio, a spokesman for the EU's Monetary Affairs Commissioner Olli Rehn, said in Brussels shortly before the Cabinet approval.

The pressure on Papandreou and his government is greater than ever, with the country's international creditors calling for cross-party support for the bailout program and openly criticizing the slow pace of reforms.

"After a strong start in the summer 2010, reform implementation came to a standstill in recent quarters," the European Union, the European Central Bank and the International Monetary Fund wrote in a summary of their recent assessment of Greece's efforts. The Associated Press obtained a copy on Thursday.

The three institutions, known as the troika, also cited "political risks" to the implementation of the budget cuts and privatization program in their findings, which were circulated among eurozone finance ministers Wednesday.

Those "doubts on the ability and the willingness of the Greek government and society to persevere in fiscal consolidation, and in restoring competitiveness" are the main reason Greece likely won't be able to access financial markets again next year, leading to serious financing gaps, the troika concluded.

In the first quarter, Greece's GDP shrank 5.5 percent from a year earlier, the national statistical agency said Thursday. The troika now expects Greece's economy to shrink by 3.8 percent in 2011, worse even than the 3.5 percent recession the EU predicted only in May.

Without the additional measures this year, Greece's budget deficit would remain above 10 percent of economic output, the troika said, way off the 7.5 percent target set out in the program.

The Finance Ministry said the measures would bring the national debt down to 139.5 percent of GDP by 2015, as opposed to a suffocating projected 198.9 percent if no measures were taken.

In addition to the recession, the crisis has led to significant job losses, with unemployment in March reaching 16.2 percent, the highest since monthly data began to be released in 2004.

The protracted pain, with little prospect of respite visible on the horizon, has prompted a series of strikes and protests.

Workers at Greek state-run companies walked off the job Thursday to protest the government's privatization plan, which they fear will lead to further job and salary cuts.

Under the slogan "we won't sell," they marched through central Athens.

Public transport workers walked off the job in the early morning and late evening, while port workers, post offices and banks called a 24-hour strike. Television station technicians were also on strike, as were journalists at the state-run broadcaster, disrupting live news programing. A general strike has been called for June 15.

Angry Greeks have taken over the central Syntagma Square, setting up a tent city in a sit-in. Tens of thousands of people thronged the square, which lies in front of Parliament, last Sunday.

A few hundred were there late Thursday, blowing whistles and chanting "Thieves, thieves."

____

Elena Becatoros in Athens, Gabriele Steinhauser in Brussels and Juergen Baetz in Berlin contributed.