European policy makers head into their second confrontation this week saying they're likely to fall short of agreement on a seven-year budget plan just as they failed to strike a deal on Greek debt.

German Chancellor Angela Merkel told lawmakers in the national parliament in Berlin today that budget talks slated for a summit tomorrow may slide into next year. France rejects cuts to farm subsidies, and the U.K. demands a spending cut.

“There are deep divisions between the member states,” Irish Prime Minister Enda Kenny said in the Dublin parliament today. “There are fears that it will not be possible to get a deal.”

The 27 European Union leaders are preparing to square off over the budget in Brussels tomorrow after euro-region finance ministers' efforts to agree on a debt-reduction plan for Greece foundered. More than 11 hours of talks ended without a deal early this morning as a bloc of top-rated creditors led by Germany refused to write off a portion of their aid loans.

That stance meant the finance chiefs were unable to scrape together enough funds from other sources to help alleviate Greece's debt burden, set to hit 190 percent of gross domestic product in 2014.

Greece's fiscal woes have defied three years of rescue efforts, rekindling doubts about Europe's crisis-containment strategy and maintaining a cloud over the euro, postwar Europe's signature economic accomplishment.

“We have a series of options on the table on how to close the financing gap,” German Finance Minister Wolfgang Schaeuble told reporters. “We discussed the issue very intensively, but since the questions are so complicated we didn't come to a final agreement.”

Schaeuble told German lawmakers that the issue of the Greek funding gap was solvable and possible solutions include reducing interest payments on its bailout loans, suspending payouts through 2020 on its second rescue package, or having the European Central Bank buy 9 billion euros ($11.5 billion) of the country's Treasury bills, according to four people who attended the briefing. Another option is for the EU's bailout fund to finance Greek government purchases of 10 billion euros of its own debt.

Greek bonds rose for a ninth day, the longest run of gains since the nation's debt was restructured in March, with investors betting an agreement to unlock rescue funds would be reached at an another emergency finance ministers' gathering Nov. 26. The yield on Greek 10-year notes fell 37 basis points to 16.73 percent at 3:30 p.m. in Brussels.

Debt Sustainability

Finance ministers failed to tackle the dual task of steering an extra 32.6 billion euros to Greece through 2016 while finding a way to tame the resulting increase in Greek debt, already the highest in Europe and deemed “unsustainable” by the International Monetary Fund.

“Further technical work on some elements of this package” is needed, Luxembourg Prime Minister Jean-Claude Juncker said in a statement. He stopped short of predicting a deal at the next meeting, which will come after the budget summit that risks further inflaming tensions between the richer north and poorer south.

The sovereign debt crisis, which has seen creditor countries in the north demand austerity from the south as a condition for aid, is aggravating the negotiations over the EU budget which has to be agreed upon every seven years.

The U.K., where Prime Minister David Cameron is facing a surge of anti-European sentiment both in his party and in the electorate, is leading the push for European austerity including salary cuts for EU officials while Spain is seeking to protect its subsidies as it battles a five-year slump. France, which this week was stripped of its top credit rating by Moody's Investors Service, is resisting cuts to farm aid, which account for about 60 percent of EU spending.

EU President Herman Van Rompuy will present a revised proposal at the start of a meeting, which is slated to begin at 8 p.m., an EU official said today. He told European leaders in a letter sent yesterday he has arranged for the summit to be extended if necessary in order to push through a deal.

“Let there be no mistake,” Van Rompuy said in the letter. “The absence of an agreement would be harmful for all of us.”

Bloomberg News

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Greek Debt Plan Failure a Bad Sign for Budget Talks

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