European officials jacked up the pressure on the Greekgovernment to deliver budget cuts in exchange for a second bailoutas they insisted that default is not an option.

Finance ministers canceled a Brussels meeting slated fortomorrow and will hold a teleconference instead to prod Greece todo more to clinch an aid package worth 130 billion euros ($170billion) along with roughly 100 billion euros of debt relief fromprivate bondholders.

“I did not yet receive the required political assurances fromthe leaders of the Greek coalition parties on the implementation ofthe program,” Luxembourg Prime Minister Jean- Claude Juncker,chairman of the euro finance panel, said in a statement today. Healso pressed for “further technical work” on Greek budget cuts.

Two years after pledging to pull Greece back from the brink,European leaders are torn between pouring more aid into thestruggling economy or risking an unprecedented national bankruptcythat might force the country out of the euro and prompt renewedtumult in European markets.

Finance ministers will discuss “outstanding issues” tomorrow andhold their next meeting as scheduled on Feb. 20, Juncker said. Thepostponement pushed the euro down to $1.3115 at 7 p.m. Brusselstime from $1.3150 earlier.

Evidence mounted today that the euro's guardians have madeprogress isolating Greece's woes. Italy sold 6 billion euros ofbonds at lower borrowing costs as investors shrugged off adowngrade of its credit rating by Moody's Investors Service.

“Policy makers are still scrambling, and markets have gottenused to it, but there is still a general feeling that the Greecesituation will not have a happy ending regardless of what theyagree to,” said Jay Mueller , who manages about $3 billion of bondsat Wells Fargo Capital Management in Milwaukee.

Finance Minister Jan Kees de Jager of the Netherlands, one offour AAA rated states left in the euro area, pushed back againstsuggestions from Athens that the aid bill will be 15 billion euroshigher than planned.

“We agreed upon 130 billion,” De Jager told Dutch RTL televisiontoday. “If now it seems more is needed, we should explore otherways.”

Greece's prospects hinged on Prime Minister Lucas Papademos'sCabinet finding 325 million euros of the extra budget cuts demandedby European governments and the International Monetary Fund asconditions for fresh loans.

Pension Cuts

By early evening, the Cabinet agreed to trim pensions atstate-owned companies and banks by 300 million euros, according toan official who declined to be named. Parties backing Papademos'sinterim government also need to endorse the savings.

Creditor governments also want Greece's feuding politicalparties to pledge planned cuts in writing, no matter who takespower in elections due in coming weeks. Greece needs the aid toenable it to make a 14.5 billion-euro bond payment on March 20.

“We should soon be able to decide on a new, second program forGreece,” European Union Economic and Monetary Commissioner OlliRehn told reporters today in Strasbourg, France. “It is really inthe interest of everybody now — in Greece and in Europe — to makethis work and avoid a disorderly default.”

Greece has depleted its credibility by missing targets fordeficit reduction, economic reforms and state-asset sales that wereset when it obtained a 110 billion-euro aid package in May2010.

As a result, the once-taboo notion of a departure or expulsionfrom the euro zone has crept into the mainstream politicaldebate.

“If they don't do this, they exclude themselves from the eurozone and the impact on the other countries now would be lessimportant than maybe a year ago,” Luxembourg Finance Minister LucFrieden said at the Atlantic Council in Washington yesterday.

Speaking yesterday to ZDF television, German Finance MinisterWolfgang Schaeuble said that if efforts to prop up Greece come tonaught, “we're better prepared than two years ago.”

Also unclear was whether the European Central Bank, buyer of219.5 billion euros of weaker countries' bonds in the past twoyears, would contribute to debt relief in the new package.

Euro statutes bar the central bank from financing governments.One workaround would be for the ECB to funnel profits from itsGreek holdings back through its national branches to eurogovernments.

ECB's Role

“These bonds were acquired at an average price that is belowface value,” ECB Executive Board member Benoit Coeure toldLiberation newspaper in an interview published today. “If there isa profit, as with all monetary holdings, it should be distributedto the states. They can use it to contribute to sustainability ofGreece's debt.”

The central bank probably spent about 47 billion euros to buyGreek bonds with a face value of 60 billion euros, yieldingpotential profits of 13 billion euros, according to JuergenMichels, chief European economist at Citigroup in London.

“But the procedure leaves open questions,” Michels said in ane-mailed note. “It remains unclear when the ECB will distribute theexpected future profits. Hence the immediate impact on Greek debtwill be small.”

Representatives of Greece's private creditors had planned totravel to Brussels in expectation of progress on the “voluntary”debt-relief accord that was another condition for the officialaid.

There was no immediate reaction from the Institute ofInternational Finance, the bank association acting on behalf ofbondholders, to the ministers' decision to hold a conference callinstead.

Bloomberg News

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