Greece to confront EU as leaders seal pact

European governments moved toward a confrontation over a second rescue package for Greece, just as a dimming fiscal outlook in Portugal opened a new front in the debt crisis.

Bargaining with Greece over a debt writedown and its economic management came as European Union leaders signed off on key planks of the strategy to end the financial crisis. They agreed to accelerate the setup of a full-time 500 billion-euro ($659 billion) rescue fund and endorsed a German-inspired deficit-control treaty. Stocks and the euro rose.

Euro leaders left a Brussels summit late yesterday with no accord over how to plug Greece?s widening budget hole and German Chancellor Angela Merkel voicing frustration with the Athens government?s failure to carry out an economic makeover.

?Greece?s debt sustainability is especially bad,? Merkel told reporters. ?You have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap.?

The summit was the 16th in the two years since the Greek debt emergency provoked a Europe-wide drama, leading to unprecedented aid packages for Greece, Ireland and Portugal and shattering European faith that the common currency was indestructible.

After the gathering of leaders, EU President Herman Van Rompuy convened a smaller group, including Greek Prime Minister Lucas Papademos and European Central Bank Executive Board member Joerg Asmussen, to weigh the next steps on Greece.

?On Track?

Van Rompuy spoke of the need ?to put the current program back on track? and said finance ministers will try to hammer out the follow-up plan — in the works since July — in coming days. Greece is counting on aid to meet a 14.5 billion-euro bond payment on March 20 to escape default.

?The timeline is tight, but we are absolutely focused on the target of bringing the negotiations to a successful conclusion by the end of the week,? Papademos told reporters at 1:30 a.m. today.

The Euro Stoxx 50 Index advanced as much as 0.9 percent today and the euro strengthened 0.3 percent to $1.3180 at 9:35 a.m. in Brussels, its sixth gain in seven days.

Yet, Papademos said ?some difficulties? beset the debt- swap talks and hinted that donor governments may have to put up more money.

Merkel?s comments indicated that governments are loath to boost an October offer of 130 billion euros of loans in a second package, forcing investors to absorb net-present-value losses on Greek bonds that go beyond the 69 percent now on the table.

Greek Feuds

In turn, Greece?s feuding political parties face pressure to deliver more savings and to verify in writing that the austerity program will be carried out, no matter who wins elections to replace Papademos?s interim Cabinet.

Germany?s proposal for an EU-appointed overseer of the Greek budget prompted consternation in Athens and led to a rejection by other European governments that warned against stigmatizing Greece.

?Greece is a sovereign nation and must enact the promises it?s made,? said French President Nicolas Sarkozy. ?Surveillance of Greece?s progress is normal, but there was never any question of putting Greece under guardianship.?

Investors were seized by fresh doubts about the economic health of Portugal. Concern that the EU would break a promise not to restructure Portugal?s debt pushed 10-year yields up by 2.17 percentage points to 17.39 percent yesterday, a euro-era record. The bonds rebounded today, sending the yield down to 16.89 percent.

?Sustainable? Portugal

Portugal?s debt has been judged ?perfectly sustainable? by the EU and International Monetary Fund, Prime Minister Pedro Passos Coelho said. Asked if there is a risk of writedowns on Portuguese bonds, he said: ?No, there is not.?

The Greek standoff and Portugal?s tottering market punctured the start-of-year crisis respite that had been nourished by 489 billion euros in three-year loans infused by the ECB into the banking system.

ECB loans enabled most bond markets to withstand the impact of credit rating downgrades by Standard

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