Europe faltered in its race to save Greece from default asfinance chiefs said further aid hinged on embattled Prime MinisterGeorge Papandreou delivering budget cuts in the face of domesticopposition.

On the eve of a confidence vote that threatens to topplePapandreou, the euro area's top economic policy makers pushedGreece to pass laws to cut the deficit and sell state assets. Theyleft open whether the country will get the full 12 billion euros($17.1 billion) promised for July as part of last year's 110billion-euro lifeline.

“The Greeks have to bring to Parliament their austerity measuresand their privatization package and they have to implement thosemeasures,” Luxembourg Finance Minister Luc Frieden told BloombergTelevision as a euro crisis meeting in Luxembourg went into asecond day. “Only if those conditions are fulfilled, we can pay outthe next tranche and at the same time look for a possible secondprogram to support Greece.”

Decisions on the next payout and a three-year follow-up packagewere put off until early July, prolonging Greece's fiscal agony andheightening the brinksmanship that has marked Europe's handling ofthe unprecedented debt crisis. The stumble negated gains made inmarkets last week after Germany indicated a second Greek bailoutwas in the works.

The euro fell 0.6 percent to $1.4253 at 11:30 a.m. in Frankfurt.Global stocks fell, with the MSCI World Index losing as much as 0.7percent, and Treasuries and bunds rose.

No 'Guarantee'
The ministers' firstseven-hour session, ending at 2 a.m., yielded a statement thatDutch Finance Minister Jan Kees de Jager said “is not a financialguarantee” for Greece. The meeting resumed today with discussionson a permanent rescue fund slated to be set up in 2013.

The deliberations coincided with a Greek parliamentary debate inAthens over a confidence vote in a new cabinet at what Papandreoucalled a “critical crossroads.” Papandreou has 155 seats in the300-seat parliament.

The Greek premier said yesterday he planned to hold a referendumlater in the year on a constitutional revamp with the goal oftackling the root causes of Greece's debt and deficits that are“symptoms of the illness, not the cause.”

Papandreou in Brussels
Papandreou travelsto Brussels today to meet European Union President Herman VanRompuy and European Commission President Jose Barroso. Theconfidence vote is scheduled for late tomorrow. The Greek crisis isset to dominate an EU summit in Brussels on June 23-24.

“The communication cacophony surrounding the policy response inour view is one of the reasons why the risk of contagion hasremained and remains high,” said Silvio Peruzzo, an economist atRoyal Bank of Scotland Group Plc in London.

Group of Seven financial officials also convened during the euroministers meeting, holding a teleconference to discuss Greece. Twoweeks ago, President Barack Obama singled out Germany as the keycountry responsible for preventing an “uncontrolled spiral ofdefault” in Europe.

Prospects for a second aid package to stave off the euro area'sfirst default were lifted by reassurances last week from Europeanofficials that the next aid payment was on track and by thedecision by German Chancellor Angela Merkel to drop calls for amandatory bond exchange that might lead credit rating companies todeclare Greece unable to pay its bills.

Merkel's June 17 concession gave a lift to stocks, bonds and theeuro, spurring optimism that leaders would get ahead of the debtcrisis that has exposed the weaknesses of Europe's economicmanagement.

Greek Bonds
Greek bonds reversed coursetoday, with the 10-year yield rising 40 basis points to 17.34percent. Greek bonds yield 14.41 percentage points more than10-year German bonds, Europe's safest investment. Standard &Poor's on June 13 cut Greece by three levels to CCC, the world'slowest debt grade.

Speculation that Greece will default has bled into otherEuropean markets, leading economists such as Nouriel Roubini topredict that the 17-nation euro, the high point of Europe'seconomic integration, won't survive in its current form.

“I don't rule out that Greece and Portugal, if they aren't ableto recover competitiveness and growth and social tension furtherincreases, may go back to the drachma and escudo on the wave ofpopulist governments,” Roubini, head of Roubini Global EconomicsLLC, told Italy's Il Sole 24 Ore on June 18.

Spanish Spread
Ireland and Portugalfollowed Greece in obtaining emergency loans in the past year.Spain's finances came under the microscope last week, withinvestors pushing the extra yield on 10-year Spanish bonds to 261basis points, the highest weekly close since January.

Moody's Investors Service said June 17 it may cut its Aa2 ratingon Italy, whose 2010 debt amounted to 119 percent of gross domesticproduct, Europe's second highest after Greece.

Greece needs to cover about 4 billion euros of bills maturingbetween July 15 and July 22, and faces about 3 billion euros ofcoupon payments in the month, according to Bloomberg calculations.A bigger test comes on Aug. 20, when Greece must redeem 6.6 billioneuros of maturing bonds.

The new Greek finance minister, Evangelos Venizelos, who wasnamed in Papandreou's cabinet overhaul three days ago, came toLuxembourg with a “strong commitment” to the planned 78 billioneuros in cuts that provoked street protests last week.

“We can achieve our target thanks to the efforts of our peopleand thanks to the cooperation and the assistance of our partners,”Venizelos said.

More than 47 percent of 1,208 Greeks surveyed by Kapa ResearchSA for To Vima newspaper oppose the wage and spending cuts andhigher taxes, and want early elections. Almost 35 percent said thepackage should be approved.

Rolling Blackouts
Fallout from theopposition to the government's austerity plans may spill over intoGreek living rooms today as workers at state-owned Public PowerCorp SA hold rolling strikes to protest Papandreou's pledge tospeed the sale of the utility to meet the goal of raising 50billion euros from asset sales by 2015.

Germany, which as Europe's largest economy is the biggestguarantor of the aid packages to Greece, Ireland and Portugal,looked for evidence that Greece's leaders are united behind anambitious economic overhaul.

“If the Greeks can't or don't want to make the necessarydecisions, then we can't move forward on this track,” GermanFinance Minister Wolfgang Schaeuble told German radio. “Greece mustfirst fulfill the conditions, then we can approve a new program sothat payment of the tranche will be possible.”

Rollovers
The key plank of a second aidpackage would be a pledge by banks, insurance companies and assetmanagers to buy new Greek bonds to replace maturing ones, insteadof European governments stepping in with taxpayers money.

In their statement, the ministers said the unlocking of freshaid depends on working out “voluntary private sector involvement inthe form of informal and voluntary rollovers of existing Greek debtat maturity.”

While Germany bowed to European Central Bank and French demandsnot to compel investors to buy new Greek bonds as old ones expire,the lines are blurry between a “voluntary” and “compulsory”rollover that would lead rating companies to declare Greece indefault.

On the table are incentives for bondholders to maintain theirexposure to Greece.

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