Europe postpones decision on loan to Greece

Reporting from London —  European finance officials put off a decision Monday on handing debt-laden Greece its next installment of emergency loans, increasing the pressure on Athens to enact new austerity measures and fueling market fears of a national default.

Investors had hoped that officials meeting in Luxembourg would approve the payout of about $17 billion in rescue loans to Greece, which desperately needs the money to pay bills that come due next month.

But after several hours of talks, finance ministers from the 17 countries that use the euro said early Monday they would release the funds only if Greek lawmakers approve a controversial program of tax hikes and spending cuts to slash the country’s mammoth budget deficit.

Photos: Clashes in Athens over Greek debt crisis

If that happens, then the $17-billion installment from the bailout package set up for Athens last year would be disbursed in July, said Jean-Claude Juncker, the prime minister of Luxembourg.

He added that approval of the austerity measures would also pave the way for a second rescue package for Greece, which has so far failed to meet its deficit-reduction targets and is stumbling beneath a mountain of public debt. The Greek economy is on course for a painful contraction this year, heightening concerns about whether the government can pay back its loans and put the economy on a more competitive footing.

International markets have been rattled for more than a year in connection with the debt crisis in Greece and the mounting woes of Ireland and Portugal, two other Eurozone countries that have had to seek emergency bailouts from the European Union and the International Monetary Fund.

All eyes are now on Athens, where violent public demonstrations and a brewing revolt within Prime Minister George Papandreou’s ruling Socialist Party have thrown the fate of his proposed austerity measures into doubt.

Last week, the beleaguered Greek leader was forced to reshuffle his Cabinet in an effort to shore up support for the austerity program, which would raise taxes, make deep cuts in public spending and sell off state assets to help balance the books. On Tuesday, Papandreou is to present his new ministerial lineup to the parliament for a crucial vote of confidence that could determine whether his government stands or falls.

Analysts say he is likely to eke out a win, which would smooth passage of the austerity package. But the volatility of the situation makes an outcome impossible to predict with certainty.

If he fails, and if Athens cannot pay its bills next month, ratings agencies would declare Greece to be in default, a step that could set off a global financial earthquake.

The crisis in Greece has been exacerbated by infighting among its fellow Eurozone members about the best way to handle the situation. Although they largely agree now on the need for a second bailout for Athens, there has been deep discord about whether private creditors should shoulder some of the burden.

Last week, Germany, the continent’s economic heavyweight, dropped its insistence that private holders of Greek debt be forced to take part in a new rescue package.

In Luxembourg on Monday, the finance ministers agreed that any such participation would be strictly voluntary. For example, private bondholders would be encouraged, but not compelled, to help by maintaining their exposure to Greek debt.

Photos: Clashes in Athens over Greek debt crisis

henry.chu@latimes.com