June 24 (Bloomberg) -- European Union leaders vowed to stave off a Greek default as long as Prime Minister George Papandreou pushes through a package of budget cuts next week, pledging to do whatever it takes to stabilize the euro economy.
“We have agreed that there will be a new program for Greece,” German Chancellor Angela Merkel told reporters at an EU summit in Brussels today. “This is an important decision that says once again we will do everything to stabilize the euro overall.”
Greece’s next hurdle is to shepherd 78 billion euros ($111 billion) of austerity measures through parliament, after yesterday’s endorsement of the program by experts from the European Commission, the European Central Bank and the International Monetary Fund.
Europe’s latest attempt to stem the debt crisis came after bonds of debt-strapped euro nations slumped and officials in the U.S. and China warned that the euro area’s failure to restore confidence threatened the world economy.
Greece’s Papandreou called the commitment to a new three-year aid program “not only a green light but also a positive sign for the future of Greece.”
The summit ended today with leaders endorsing Italy’s Mario Draghi as the next president of the ECB after a last-minute dispute threatened to overshadow the efforts on Greece. French President Nicolas Sarkozy held up the confirmation of Draghi, 63, until another Italian on the ECB’s board, Lorenzo Bini Smaghi, offered to step down to make way for a Frenchman.
Bini Smaghi promised to move to a “new job” by the end of the year, Sarkozy said in Brussels. Draghi is slated to take over the ECB helm from Jean-Claude Trichet on Nov. 1.
Yesterday’s discussions were dominated by Greece, which is drawing on 110 billion euros of loans pledged last year. The leaders paired their show of solidarity with pressure on the Greek opposition party to fall in line with the savings program.
Opposition leader Antonis Samaras refused to commit in meetings with fellow European conservatives in Brussels. While backing budget cuts, he lashed out at the “current policy mix” for too much reliance on tax increases.
The euro trimmed its decline against the dollar, on course for a third weekly drop. It was down 0.2 percent at $1.4223 as of 1:50 p.m. in London. The yield on the 10-year Greek bond declined by five basis points to 16.82 percent.
Papandreou offered an assurance that he would deliver the budget cuts demanded in exchange for the 12 billion-euro installment of emergency loans due in July and a new rescue package, a Greek government official said.
Speaking of “difficult and worrisome days,” EU President Herman Van Rompuy said Greek belt-tightening is “absolutely necessary to restore confidence and over time foster economic growth.”
Already at a European record of 142.8 percent of gross domestic product, Greek debt is set to rise to 166.1 percent next year, the EU predicts. The effort to cut a budget deficit that is about 10 percent of GDP has helped deepen a third year of recession.
In Athens, Finance Minister Evangelos Venizelos, in office since a June 17 cabinet revamp, yesterday announced measures including a 5 percent tax on lawmakers’ incomes, a levy on self-employed professionals and a reduction in the tax-free income allowance. Greek lawmakers will vote on the package on June 30, in time for a July 3 meeting of European finance ministers to agree to pay the next installment.
Greece needs to cover about 4 billion euros of bills maturing between July 15 and July 22 and faces about 3 billion euros of coupon payments in the month, according to Bloomberg calculations. A bigger test comes on Aug. 20 when it must redeem 6.6 billion euros of bonds.
Papandreou said a European commitment to aid Greece will make it easier for him to sell the Greek people on austerity measures that have provoked strikes and riots.
“If there is a strong commitment from the European Union there will be a strong commitment from Greece,” Papandreou said.
The EU sweetened the offer by pledging to increase its contribution to Greek infrastructure projects and provide more “technical assistance” to enable the Greek government and companies to tap European subsidies.
Europe will “look at how we can use existing European structural funds in Greece so that they have an immediate impact on growth and jobs,” European Commission President Jose Barroso said.
‘Informal and Voluntary’
Leaders of the euro area’s six AAA rated countries have said the key ingredient of a second package must be a pledge by banks, insurance companies and asset managers to maintain their holdings of Greek bonds.
An EU statement spoke of the need for “informal and voluntary rollovers of existing Greek debt at maturity,” avoiding a coercive exchange that would lead credit-rating companies to declare Greece in default.
To make the rollover voluntary, talks with Greek bondholders must be held on a country-by-country basis, not organized from Brussels, an EU official told reporters yesterday. The EU wants national central banks and finance ministries to speak to financial institutions in their countries, the official said.
“We don’t see any way that investors are going to come out being paid on time and in full,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania.
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