EU seeks mechanism to contain Greek debt crisis

European Union finance ministers called for strong action to ensure stability before they met on Sunday to discuss ways of ring-fencing Greece's debt crisis to stop it spreading to countries like Portugal and Spain.

The European Commission will ask the ministers to extend an aid mechanism for non-euro zone countries to nations in the single-currency bloc to safeguard euro zone financial stability, EU sources said.

The Commission will also ask the extraordinary meeting of ministers to raise the existing amount available under the mechanism, called the balance-of-payments facility, by 60 billion euros ($80.5 billion). The maximum available now is 50 billion euros.

We are going to defend the euro... we have to give more stability to our guarantee, Spanish Economy Minister Elena Salgado told reporters before the Brussels talks.

Ministers of France, Finland and other countries also stressed the need to defend the euro currency.

I think it is important that we do everything we can to stabilize the markets, to show that we are coming through one of the difficult periods, and that we are prepared to do what is necessary to ensure that we have that stability, British finance minister Alistair Darling told reporters.

Financial markets have been pounding euro zone countries with high deficits or debts as well as low economic growth, threatening to force Portugal, Spain and Ireland into a position where, like Greece, they would need to seek financial aid.

An EU summit on Friday approved 110 billion euros ($147 billion) in emergency EU/IMF loans to Greece over three years to help it over a budget crisis in exchange for austerity measures so sharp that they have already caused violent protests.

Economists estimate that if Portugal, Ireland and Spain eventually come to require similar three-year bailouts, the total cost could be some 500 billion euros.

The EU sources said the 60 billion top-up under the aid mechanism would be used as base capital, or collateral, for borrowing on the markets, which would allow the Commission to raise up to 10 times that amount.

The 60 billion top-up would be guaranteed by all 27 members of the European Union and the loans, if paid out to an EU member, would carry conditions set by the International Monetary Fund, one EU source said.

As an additional measure for euro zone countries only, the Commission will propose a separate mechanism of intergovernmental loans, the source said.

MARKET TURMOIL

The leaders of the 16 countries that use the single currency, who have been accused of heightening market uncertainty through lack of action, agreed last week to speed budget cuts and ensure deficit targets are met this year.

The euro zone is going through the worst crisis since its creation, French President Nicolas Sarkozy said after Friday's euro zone summit in Brussels.

Fears that a euro zone debt crisis could rock banks and the global economy like the September 2008 collapse of U.S. bank Lehman Brothers swept through markets last week, pushing global stocks to around a three-month low.

Last week's euro zone summit asked for a European Stabilisation mechanism to be ready before markets open on Monday.

Some economists said the move was welcome news, but it would cure the symptoms, rather than the disease.

By putting in place additional safeguards for the euro area financial system, governments finally appear to be rising to the challenge of the sovereign debt crisis, Morgan Stanley said in a research note to clients.

But, like the measures taken before - for the benefit of Greece - a stabilisation fund is just buying time for distressed borrowers, the bank said.

It added: The fiscal policy action taken in these countries during this extra time is essential. If yet another rescue mechanism isn't followed by aggressive austerity measures, the problem just continues to fester - and could eventually spread even wider.

(Writing by Charles Dick)