LONDON — European officials on Thursday sought to calm fears over a possible financial collapse in Greece, saying that short-term aid to Athens was imminent, even as the euro slumped and concern heightened that debt troubles could engulf larger economies such as Spain.
Olli Rehn, the European Union’s economic commissioner, said a crucial $17 billion aid disbursement to Greece from the E.U. and the International Monetary Fund would land in Athens by early July, in time to prevent the nation from running out of cash to pay its creditors. Release of the funding, part of Greece’s $160 billion bailout approved last year, was being held up by deadlocked talks over the size and shape of a second massive bailout that the country now needs as its financial straits worsen.
Rehn said an agreement on the release of the $17 billion was set to be reached this weekend by finance ministers from the 17 nations that share the euro. The funds, he said, would no longer be linked to a broader agreement on a second bailout. He said he expected the IMF to agree to the plan.
“We will avoid the default scenario and pave the way for an agreement,” Rehn said in a statement.
Nevertheless, he cautioned that the funds would be tied to the Greek government’s approval of tough austerity measures, whose passage remains in doubt as Prime Minister George Papandreou is suddenly having to fight for his political life.
Papandreou was set to announce a major reshuffling of his Cabinet on Thursday, with analysts keenly watching the fate of his finance minister, George Papaconstantinou, considered the architect of reforms meant to curb runaway spending and tackle a culture of tax evasion that first plunged Greece into an economic crisis in late 2009. Struggling to pass a vital but unpopular package of reforms to meet the terms of the E.U.-IMF agreement, Papandreou said he would call for a vote confidence this weekend as a way to pressure parliament to back the measures in a vote next week.
But on Thursday, Papandreou was running up against more resistance, as two more of his Socialist party members turned against his reform crusade.
“At this very difficult moment, there is only one goal for all of us: stability, to keep the country and its economy on its feet, to continue without interruption the financing of the country and its lenders,” Papaconstantinou told reporters in Athens.
Questions lingered, however, on whether bitterly divided European leaders could agree on a longer-term, second aid package for Greece. Reports have indicated that Germany — which is pressing for investors to take losses as part of a deal, wholly against the advice of the European Central Bank – may try to delay a deal until September.
On Thursday, investors’ fears mounted that other, larger indebted European economies may be next. Spain was forced to pay painfully high interest rates on Thursday during an auction of government debt, suggesting just how risky the euro-zone’s fourth-largest economy is now seen by investors. The borrowing costs for Italy and Belgium also rose, even as the euro slipped against a number of global currencies.
“The fact that the situation has deteriorated in Greece has made the situation more acute,” said Gavan Nolan, a research analyst at Markit Group in London. “The E.U. and the IMF look set to delay the day of reckoning, giving them more time. But it throws the ball back into the court of the Greek government. Can they pass the austerity measures? That’s the key for the market.”