EU leadership puts IMF on standby for Greek bailout

European leaders have put the International Monetary Fund on standby to help aid debt-stricken Greece, shrugging off the European Central Bank's plea that Europe solve the crisis on its own.

Leaders of the 16-nation eurozone endorsed a Franco-German proposal for a mix of IMF and bilateral loans at market interest rates, while voicing confidence that Greece would not need outside help to cut Europe's biggest budget deficit.

"It's an extremely clear political message," European Union president Herman Van Rompuy told reporters after the leaders met in Brussels early yesterday morning. "It's a mixed mechanism but with Europe playing the dominant role. It will be triggered as a last resort."

European leaders sought to bury concerns that divisions over aiding Greece would escalate the debt crisis and further undermine the euro after it sank to a 10-month low against the US dollar.

After objecting to a possible IMF intrusion on the US$12 trillion eurozone economy, the ECB endorsed the package, with president Jean-Claude Trichet saying European governments will remain in control of the process.

Trichet described surrendering control to the IMF as "very, very bad", before backtracking and revising his comments.

The euro rallied after Trichet came out in favour of the package.

Under the accord brokered by German Chancellor Angela Merkel and French President Nicolas Sarkozy, each eurozone country would provide non-subsidised loans to Greece based on its stake in the ECB, a statement said. Europe would provide more than half the loans and the IMF the rest, which would only be triggered if Greece runs out of fund-raising options.

Asserting her clout as head of the EU's largest economy, Merkel pushed for the IMF to be brought in amid mounting opposition in Germany to putting taxpayers' funds at risk. Counterparts, including Sarkozy, said Europe should show its credibility by fixing the crisis on its own with loans to Greece.

The contingency plan is "very satisfying", Greek Prime Minister George Papandreou said. "Europe, and Greece with it, emerge stronger from this crisis."

The Greek government is counting on wage cuts and tax increases to shave the deficit to 8.7 per cent of gross domestic product this year from 12.7 per cent last year, the highest in the euro's 11-year history.

"It's a stopgap plan," said Klaus Baader, co-chief eurozone economist at Societe Generale. "It really only meets Greek expectations half way. It'll help get bond yields down, but won't be enough to satisfy the markets."

Greece needs to sell about €10 billion (HK$103 billion) of bonds in coming weeks. About €8.2 billion of debt matures on April 20 and €8.5 billion on May 19, with about €3.9 billion of bills maturing next month.

The budget deficits of all 16 euro nations are forecast to exceed the EU's limit of 3 per cent of gross domestic product this year after the worst recession since at least the second world war. While the euro's German-designed "stability pact" foresees financial penalties for countries that go over the limits, no country has been punished.

Merkel has left open the possibility of pushing wayward countries out of the euro and sought a rewrite of European treaties to impose more fiscal rectitude. All 27 EU countries would have to back such an overhaul. The EU's latest treaty, in force since December, took eight years to negotiate and ratify.