ATHENS (Reuters) – Greek political leaders face crunch talks on Tuesday to hammer out a deal on unpopular reforms that have prompted the country’s biggest labor unions to walk off the job.

Failure to strike a deal to secure the 130-billion-euro ($170 billion) rescue risks pushing Athens into a chaotic debt default which could threaten its future in the euro zone.

European Union (EU) officials say the full package must be agreed with Greece and approved by the euro zone, European Central Bank and International Monetary Fund before February 15 to allow time for complex legal procedures involved in the bond swap to be completed in time for a March 20 bond redemption.

In some euro zone countries, including Germany and Finland, parliamentary approval is required to raise the bailout money.

In Paris, German Chancellor Angel Merkel on Monday expressed the exasperation among euro zone leaders at seemingly endless arguing in Athens that has yet to produce a definitive acceptance of the austerity and reform demanded by the lenders.

“I honestly can’t understand how additional days will help. Time is of the essence. A lot is at stake for the entire euro zone,” she told a news conference with French President Nicolas Sarkozy.

But leaders of the three parties in the coalition government appeared to need at least one additional day.

The office of Prime Minister Lucas Papademos, a former central banker who heads a government of politicians, said that a meeting of leaders from the conservative, socialist and far-right parties due on Monday had been postponed to Tuesday.

No reason was given for the delay. Papademos held further talks with the “troika” of lenders – the European Commission, ECB and IMF – on Monday.

The party leaders, positioning themselves for a likely general election in April, have balked at accepting another package of deeply unpopular wage and pension reductions, job cuts and tougher tax enforcement measures.

Alarmed by the prospect of yet more budget cuts, Greece’s two main trade unions said they will hold a 24-hour strike on Tuesday in protest against policies they say have only driven the economy into a downward spiral.

Demonstrations are planned in central Athens.

PATIENCE WEARING THIN

Greeks watched the political drama with the same angry exasperation they have shown throughout the nation’s nearly three-year crisis, mixed with fear of the consequences of leaving the euro.

“We are stuck between a rock and a hard place. We are lost either way but political leaders have to agree,” said Kosmas Georgiou, a 31-year old company inspector. “Going back to the drachma is not an option, it’s disaster.”

“They are delaying this just to look like heroes.”

Merkel made clear that her patience was wearing thin on a deal that affects not only Greece but the wider currency bloc, which fears that a default would hit much larger economies such as Spain and Italy.

One government official said the entire Greek side had to agree terms of the rescue, which would be the second for Athens since 2010, with international lenders before the next meeting of the Eurogroup of euro zone finance ministers.

No date has been set for the Eurogroup meeting, and a European Commission spokesman said it would be held only when Greece had made a commitment to the deal.

Papademos said after five hours of talks on Sunday that party chiefs had agreed measures including wage cuts and other reforms as part of spending cuts worth 1.5 percent of gross domestic product.

But leaders of the PASOK socialist party, the conservative New Democracy and the far-right LAOS party still have to reach agreement on several unresolved issues.

These include labor market reform and shoring up domestic banks. Greece needs the bailout money by mid-March to meet big debt repayments but tempers are rising in the EU over what it sees as Greek dithering on implementing reforms.

Greeks have been worn down by a deep recession, now in its fifth year, and wave after wave of austerity measures imposed under the first bailout.

($1 = 0.7621 euros)

(Additional reporting by Karolina Tagaris, Writing by Deepa Babington and David Stamp; Editing by Michael Roddy)

ATHENS/PARIS (Reuters) – German Chancellor Angela Merkel told Greece on Monday to make up its mind fast on accepting the painful terms for a new EU/IMF bailout, but the country’s political leaders responded by delaying their decision for yet another day.

Failure to strike a deal to secure the 130 billion euro ($170 billion) rescue – much of which Germany will fund – risks pushing Athens into a chaotic debt default which could threaten its future in the euro zone.

Speaking in Paris, Merkel expressed the exasperation spreading among euro zone leaders at seemingly endless wrangling in Athens that has yet to produce a definitive acceptance of the austerity and reform conditions demanded by the lenders.

“I honestly can’t understand how additional days will help. Time is of the essence. A lot is at stake for the entire euro zone,” she told a news conference with President Nicolas Sarkozy.

But leaders of the three parties in the coalition government appeared to need at least one additional day.

The office of Prime Minister Lucas Papademos, a former central banker who heads a government of politicians, said that a meeting of leaders from the conservative, socialist and far-right parties due on Monday had been postponed to Tuesday.

A statement issued shortly after Merkel spoke gave no reason for the delay. However, it said Papademos would hold further talks with the “troika” of lenders – the European Commission, European Central Bank and IMF – later on Monday.

The party leaders, positioning themselves for a likely general election in April, have baulked at accepting another package of deeply unpopular wage and pension reductions, job cuts and tougher tax enforcement measures.

PATIENCE WEARING THIN

Merkel made clear that her patience was wearing thin on a deal that affects not only Greece but the wider currency bloc, which fears that a default would hit much larger economies such as Spain and Italy.

In a fresh sign of mistrust, the German leader said she and Sarkozy agreed Greece should deposit revenue to meet future interest payments in a special escrow account to guarantee that creditors were paid consistently.

“We want Greece to stay in the euro,” she said. But she added: “I want to make clear once again that there can be no deal if the troika proposals are not implemented. They are on the table … Something needs to happen quickly.”

“A lot is at stake for the entire euro zone,” added Merkel, whose country is Europe’s main paymaster.

This sense of urgency seemed to be weaker in Athens.

An official at one coalition party said the postponement was due to the fact that the government has not yet supplied the parties with a 15-page summary of the conclusions of a meeting on Sunday of the political leaders.

“This would serve as the basis of today’s discussion,” the official said. “This paper has not been provided yet and that’s the most likely reason for the postponement.”

Earlier, a Greek government official denied that the three parties in the coalition government had been given an ultimatum to respond on Monday, after weeks of arguing over another wave of austerity in return for the 130 billion euro bailout.

In Brussels, the European Commission took issue with this. “We have gone beyond the deadline already,” Commission spokesman Amadeu Altafaj told a news briefing, adding that the Greek authorities had still to take the necessary decisions.

Challenged about the troika’s demand to cut Greece’s minimum wage, he said it averaged 871 euros a month, compared with 748 euros in Spain, which is not under an EU/IMF rescue program, and 566 euros in Portugal, which has received a bailout.

Talks on the bailout have dragged on for weeks.

One government official said the entire Greek side had to agree terms of the rescue, which would be the second for Athens since 2010, with international lenders before the next meeting of the Eurogroup of euro zone finance ministers.

“The only deadline is to have a staff agreement for the second bailout and the agreement of the political leaders before Eurogroup,” said the official, who requested anonymity.

No date has yet been set for the Eurogroup meeting, and the Commission spokesman said it would be held only when Greece had made its commitments to the deal.

Leaders of the PASOK socialist party, the conservative New Democracy and the far-right LAOS party still have to agree on unresolved problems.

These include labor market reform and shoring up domestic banks. Greece needs the bailout money by mid-March to meet big debt repayments but tempers are rising in the European Union over what it sees as Greek dithering on implementing reforms.

BANK HOPES

Papademos said after five hours of talks on Sunday that party chiefs had agreed measures including wage cuts and other reforms as part of spending cuts worth 1.5 percent of gross domestic product.

Hopes rose on Monday that they had also made progress on recapitalizing domestic banks, which are up to their necks in Greek government bonds now worth a fraction of their face value.

Greek bank stocks were up 9.7 percent in the afternoon on hopes that lenders would be recapitalized without being nationalized after a debt swap under the latest bailout deal, which will radically cut the value of their bond holdings.

The euro fell on Monday as the failure of Greek coalition parties to sign off on the terms of a new bailout kept alive the risk of a chaotic default that could ensnare other countries such as Portugal.

WORN DOWN

Greeks have been worn down by a deep recession, now in its fifth year, and wave after wave of austerity measures imposed under the first bailout.

Alarmed by the prospect of yet more budget cuts, Greece’s two main trade unions said they would call a 24-hour strike for Tuesday in protest against policies they say have only driven the economy into a downward spiral.

Leftist and communist-affiliated groups will rally at around 1600 GMT on Monday to march to parliament.

With Greece facing 14.5 billion euros of debt repayments in March, a bill it cannot meet without further bailout funds, the stakes could not be higher.

Officials have emerged increasingly despondent after each round of talks, complaining that the troika of European Central Bank, European Commission and International Monetary Fund was refusing to yield on demands to cut the minimum wage, axe holiday bonuses and fire public sector workers.

New Democracy and LAOS in particular have staunchly opposed further wage and spending cuts, arguing they risk precipitating an even deeper recession and imposing more pain on Greeks. ($1 = 0.7621 euros)

(Additional reporting by Renee Maltezou, Tatiana Fragou and Harry Papachristou in Athens, Jan Strupczewski and John O’Donnell in Brussels, Annika Breidthardt in Berlin; Writing by David Stamp and Ingrid Melander; Editing by Paul Taylor)

ATHENS/PARIS (Reuters) – Greece let yet another deadline slip on Monday for responding to painful terms for a new EU/IMF bailout, as German Chancellor Angela Merkel made clear Europe’s patience is wearing thin over drawn-out negotiations among its feuding political leaders.

Failure to strike a deal to secure the 130 billion euro ($170 billion) rescue risks pushing Athens into a chaotic debt default which could threaten its future in the euro zone.

Merkel turned up the heat, saying Athens had to come to terms with the “troika” of lenders – the European Commission, European Central Bank and IMF – to get the funds it needs to meet big debt repayments in March.

Greek political leaders, positioning themselves for a likely general election in April, have baulked at accepting another package of deeply unpopular wage and pension reductions, job cuts and tougher tax enforcement measures.

Speaking in Paris alongside French President Nicolas Sarkozy, Merkel said she wanted quick action from Athens.

“We want Greece to stay in the euro,” she told a news conference. But she added: “I want to make clear once again that there can be no deal if the troika proposals are not implemented. They are on the table, time is of the essence. Something needs to happen quickly.”

Merkel, whose country is Europe’s main paymaster, made clear that the deal affected not only Greece but the wider currency bloc, which fears that a default would hit much larger economies such as Spain and Italy.

“A lot is at stake for the entire euro zone,” she said.

NO ULTIMATUM

Earlier, a Greek government official denied that the three parties in the coalition government had been given an ultimatum to respond on Monday, after weeks of arguing over another wave of austerity in return for the 130 billion euro bailout.

In Brussels, the European Commission took issue with this. “We have gone beyond the deadline already,” Commission spokesman Amadeu Altafaj told a news briefing, adding that the Greek authorities had still to take the necessary decisions.

Challenged about the troika’s demand to cut Greece’s minimum wage, he said it averaged 871 euros a month, compared with 748 euros in Spain, which is not under an EU/IMF rescue program, and 566 euros in Portugal, which has received a bailout.

Talks on the bailout have dragged on for weeks.

Panos Beglitis, spokesman of the PASOK socialist party, said on Sunday that leaders of the three parties backing technocrat Prime Minister Lucas Papademos’ government had to give their responses in principle by noon (1000 GMT). On Monday he said this deadline had slipped to Tuesday.

Asked whether the parties had to respond in time for a Euro Working Group meeting of finance ministry officials in Brussels, the Greek official said: “No, there is no deadline.”

He said the entire Greek side had to agree terms of the rescue, which would be the second for Athens since 2010, with international lenders before the next meeting of the Eurogroup of euro zone finance ministers.

“The only deadline is to have a staff agreement for the second bailout and the agreement of the political leaders before Eurogroup,” said the official, who requested anonymity.

No date has yet been set for the Eurogroup meeting, and the Commission spokesman said it would be held only when Greece had made its commitments to the deal.

Leaders of PASOK, the conservative New Democracy and the far-right LAOS party – who may face an angry electorate in parliamentary polls as soon as April – still have to agree on unresolved problems.

These include labor market reform and shoring up domestic banks. Greece needs the bailout money by mid-March to meet big debt repayments but tempers are rising in the European Union over what it sees as Greek dithering on implementing reforms.

BANK HOPES

Papademos said after five hours of talks on Sunday that party chiefs had agreed measures including wage cuts and other reforms as part of spending cuts worth 1.5 percent of gross domestic product.

Hopes rose on Monday that they had also made progress on recapitalizing domestic banks, which are up to their necks in Greek government bonds now worth a fraction of their face value.

Greek bank stocks were up 6.6 percent in the afternoon on hopes that lenders would be recapitalized without being nationalized after a debt swap under the latest bailout deal, which will radically cut the value of their bond holdings.

“Banks are concerned with the way they will be recapitalized, so that they remain independent … It seems it will be done through a combination of instruments, which will reduce the risk of their nationalization,” said Natasha Roumantzi, head of analysis at Piraeus Securities.

The euro fell broadly on investor concern that the parties had yet to sign off on the terms of a new bailout with a deadline imminent, keeping alive the risk of a messy default which could rock the currency bloc.

WORN DOWN

Greeks have been worn down by a deep recession, now in its fifth year, and wave after wave of austerity measures imposed under the first bailout.

Alarmed by the prospect of yet more budget cuts, Greece’s two main trade unions said they would call a 24-hour strike for Tuesday in protest against policies they say have only driven the economy into a downward spiral.

Leftist and communist-affiliated groups will rally at around 1600 GMT on Monday to march to parliament.

With Greece facing 14.5 billion euros of debt repayments in March, a bill it cannot meet without further bailout funds, the stakes could not be higher.

Officials have emerged increasingly despondent after each round of talks, complaining that the troika of European Central Bank, European Commission and International Monetary Fund was refusing to yield on demands to cut the minimum wage, axe holiday bonuses and fire public sector workers.

New Democracy and LAOS in particular have staunchly opposed further wage and spending cuts, arguing they risk precipitating an even deeper recession and imposing more pain on Greeks. ($1 = 0.7621 euros)

(Additional reporting by Tatiana Fragou and Harry Papachristou in Athens, Jan Strupczewski and John O’Donnell in Brussels, Annika Breidthardt in Berlin, Daniel Flynn in Paris; Writing by David Stamp and Ingrid Melander; Editing by Paul Taylor)

BRUSSELS (Reuters) – Chancellor Angela Merkel cemented her political ascendancy in Europe on Monday when 25 out of 27 EU states agreed to a German-inspired pact for stricter budget discipline, even as they struggled to rekindle growth from the ashes of austerity.

Only Britain and the Czech Republic refused to sign a fiscal compact in March that will impose quasi-automatic sanctions on countries that breach European Union budget deficit limits and will enshrine balanced budget rules in national law.

The accord was eagerly greeted by the European Central Bank which has long pressed euro zone governments to put their houses in order.

“It is the first step towards a fiscal union. It certainly will strengthen confidence in the euro area,” ECB President Mario Draghi said.

Officially, the half-day summit focused mainly on a strategy to revive growth and create jobs at a time when governments across Europe are having to cut public spending and raise taxes to tackle mountains of debt.

But differences over the limits of austerity, and Greece’s unfinished debt restructuring negotiations, hampered efforts to convey a more optimistic message that Europe is getting on top of its debt crisis.

Merkel told a news conference the agreements on the fiscal pact and a permanent rescue fund for the euro zone were a “small but fine step on the path to restoring confidence.”

French President Nicolas Sarkozy said he expected a deal on reducing Greece’s debt to private bondholders within days and he believed independent European institutions – a clear reference to the ECB – would help meet a funding gap.

European Council President Herman Van Rompuy said a deal was needed this week to be finalized in time to avert a chaotic Greek default in mid-March when it faces huge bond repayments.

Leaders agreed that a 500-billion-euro European Stability Mechanism will enter into force in July, a year earlier than planned, to back heavily indebted states.

Europe is already under pressure from the United States, China, the International Monetary Fund and some of its own members to increase the size of the financial firewall, but Merkel has refused to consider the issue before March.

EURO “MESS”

Many economists doubt the wisdom of so severely restricting deficit spending, and EU diplomats say the fiscal compact was mostly a political gesture to calm German voters angry at repeated euro zone bailouts and to restore market confidence.

“To write into law a Germanic view of how one should run an economy and that essentially makes Keynesianism illegal is not something we would do,” a British official said.

There was no repetition of last month’s confrontation between British Prime Minister David Cameron and Sarkozy when Cameron vetoed efforts to amend the EU treaty to tighten euro zone budget discipline.

But the British and French leaders sniped at each other at separate news conferences while professing mutual respect.

Cameron told reporters: “Our national interest is that these countries get on and sort out the mess that is the euro.”

German Chancellor Angela Merkel said that although Cameron had shown no sign of relenting in his opposition to treaty change, the new pact could be easily slotted into EU law at a later date and she expected it would be within five years.

Financial markets fretted over the lack of tangible progress in the Greek debt talks and gloom about Europe’s economic outlook. The risk premium on southern European government bonds rose while the euro and stocks fell.

Highlighting those fears, Spain’s economy contracted in the last quarter of 2011 for the first time in two years and looks set to slip into a long recession.

France halved its 2012 growth forecast to a mere 0.5 percent in a potentially ominous sign for Sarkozy’s troubled bid for re-election in May. But the president said Paris could achieve its deficit reduction target without further savings.

Italy, rushing through sweeping economic reforms under new Prime Minister Mario Monti, was rewarded with a significant fall in its borrowing costs at an auction of 10- and 5-year bonds, despite two-notch downgrades of its credit rating by Standard & Poor’s and Fitch this month.

But Portugal’s slide towards becoming the next Greece – needing a second bailout to avoid chaotic bankruptcy – gathered pace as banks raised the cost of insuring government bonds against default and insisted the money be paid up front instead of over several years.

The yield spread on 10-year Portuguese bonds over safe haven German Bunds topped 15 percentage points for the first time in the euro era.

GREEK UNCERTAINTY

Negotiations between Greece and private bondholders over restructuring 200 billion euros of debt made progress over the weekend, but were not concluded before the summit.

Until there is a deal, EU leaders cannot move forward with a second, 130-billion-euro rescue program for Athens, which they originally pledged at a summit last October.

Prime Minister Lucas Papademos and his finance minister met the heads of EU institutions right after the summit to discuss conditions for the rescue package, officials said.

The ESM was meant to replace the European Financial Stability Facility, a temporary fund that has been used to bail out Ireland and Portugal. But pressure is mounting to combine the resources of the two funds to create a super-firewall of 750 billion euros ($1 trillion).

The IMF says if Europe puts up more of its own money, that will convince others to give more resources to the IMF, boosting its crisis-fighting abilities and improving market sentiment.

Germany has so far resisted such a step.

Merkel has said she will not discuss the issue of the ESM/EFSF’s ceiling until the next EU summit in March. Meanwhile, financial markets will continue to worry that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.

The EU will consider how to deploy 82 billion euros of unspent funds from the EU’s 2007-2013 budget. Some will be recycled towards job creation, especially among the young.

But with no new public money available for a stimulus, they focused mainly on promoting structural reforms such as loosening labor market regulation, cutting red tape for business and promoting innovation.

($1 = 0.7615 euros)

(Additional reporting by Julien Toyer, Harry Papachristou and Robin Emmott in Brussels, Marius Zaharia, William James, Chris Wickham and Jeremy Gaunt in London,; Roberta Cowan in Amsterdam,; Writing by Paul Taylor; Editing by Mike Peacock)

BRUSSELS (Reuters) – European leaders agreed on a permanent rescue fund for the euro zone on Monday and 25 out of 27 EU states backed a German-inspired pact for stricter budget discipline, but they struggled to reconcile fiscal austerity with economic growth.

Only Britain and the Czech Republic refused to sign a fiscal compact in March that will impose quasi-automatic sanctions on countries that breach European Union budget deficit limits and pledging to enact balanced budget rules in national law.

Officially, the half-day summit focused mainly on a strategy to revive growth and create jobs at a time when governments across Europe are having to cut public spending and raise taxes to tackle mountains of debt.

But differences over the limits of austerity, and Greece’s unfinished debt restructuring negotiations, hampered efforts to send a more optimistic message that Europe is getting on top of its debt crisis.

French President Nicolas Sarkozy told a news conference he expected a final agreement on reducing Greece’s debt to private bondholders “in the next few days” and believed that European institutions – a clear reference to the European Central Bank – would decide independently to help meet a funding gap.

EU Council President Herman Van Rompuy said a deal was needed this week in order for it to be finalized in time to avert a Greek default in mid-March when it faces huge bond repayments.

Asked about a German proposal to place Greek public finances under the control of a European commissar, Sarkozy said: “That there should be supervision is quite normal, but there can be no question of any country being put under stewardship.”

The leaders agreed that a 500-billion-euro European Stability Mechanism will enter into force in July, a year earlier than planned, to back heavily indebted states. But Europe is already under pressure from the United States, China, the International Monetary Fund and some of its own members to increase the size of the financial firewall.

The risk premium on southern European government bonds rose while the euro and stocks fell on concerns about a lack of tangible progress in the Greek debt talks and gloom about Europe’s economic outlook.

Highlighting those fears, Spain’s economy contracted in the last quarter of 2011 for the first time in two years and looks set to slip into a long recession.

France halved its 2012 growth forecast to a mere 0.5 percent in a potentially ominous sign for Sarkozy’s troubled bid for re-election in May. The president said Paris could achieve its deficit reduction target without further savings.

Conservative Spanish Prime Minister Mariano Rajoy, attending his first EU summit, said Madrid was clearly not going to meet its target of 2.3 percent growth this year. That has raised doubts about whether it can cut its budget deficit from around 8 percent of economic output in 2011 to 4.4 percent by the end of this year as promised.

European Commission President Jose Manuel Barroso hinted Brussels may ease Spain’s near-unattainable 2012 deficit target after it updates EU growth forecasts on February 23.

Italy, rushing through sweeping economic reforms under new Prime Minister Mario Monti, was rewarded with a significant fall in its borrowing costs at an auction of 10- and 5-year bonds, despite two-notch downgrades of its credit rating by Standard & Poor’s and Fitch this month.

But Portugal’s slide towards becoming the next Greece – needing a second bailout to avoid chaotic bankruptcy – gathered pace as banks raised the cost of insuring government bonds against default and insisted the money be paid up front instead of over several years.

The yield spread on 10-year Portuguese bonds over safe haven German Bunds topped 15 percentage points for the first time in the euro era.

OUTLAWING KEYNES?

Many economists doubt the wisdom of so severely restricting deficit spending and EU diplomats say the fiscal compact was mostly a political gesture to calm German voters angry at repeated euro zone bailouts and to restore market confidence.

European Parliament President Martin Schulz told the leaders the new fiscal treaty was unnecessary and unbalanced, because it failed to combine budget rigor with investment in public works to create jobs.

“To write into law a Germanic view of how one should run an economy and that essentially makes Keynesianism illegal is not something we would do,” a British official said.

Sarkozy said Czech Prime Minister Petr Necas had said he could not sign up now for constitutional reasons.

There was no repetition of last month’s confrontation between British Prime Minister David Cameron and Sarkozy when Cameron vetoed efforts to amend the EU treaty to tighten euro zone budget discipline.

But the British leader told reporters: “We are not signing this treaty. We are not ratifying it. And it places no obligations on the UK.

“Our national interest is that these countries get on and sort out the mess that is the euro,” he added.

German Chancellor Angela Merkel said that although Cameron had shown no sign of relenting in his opposition to treaty change, the new pact could be easily slotted into EU law at a later date and she expected it would be within five years.

The 17th summit in two years as the EU battles to resolve its sovereign debt problems was called to shift the narrative away from politically unpopular austerity and towards growth.

Merkel said it would not be the last crisis summit, but Monday’s meeting had made a “small but fine step on the road to restoring confidence.”

Negotiations between Greece and private bondholders over restructuring 200 billion euros of debt made progress over the weekend, but were not concluded before the summit.

Until there is a deal, EU leaders cannot move forward with a second, 130-billion-euro rescue program for Athens, which they originally pledged at a summit last October.

A Greek official said Prime Minister Lucas Papademos and his finance minister met the heads of EU institutions after the summit to discuss the rescue package.

Germany caused outrage in Greece by proposing that Brussels take control of Greek public finances to ensure it meets fiscal targets. Greek Finance Minister Evangelos Venizelos said that to make his country choose between national dignity and financial assistance ignored the lessons of history.

Merkel played down the controversy, saying EU leaders had agreed in October that Greece was a special case that required more European help and supervision to implement reforms and achieve its fiscal targets.

SUPER-FIREWALL?

The ESM was meant to replace the European Financial Stability Facility, a temporary fund that has been used to bail out Ireland and Portugal. But pressure is mounting to combine the resources of the two funds to create a super-firewall of 750 billion euros ($1 trillion).

The IMF says if Europe puts up more of its own money, that will convince others to give more resources to the IMF, boosting its crisis-fighting abilities and improving market sentiment.

Germany has so far resisted such a step.

Merkel has said she will not discuss the issue of the ESM/EFSF’s ceiling until the next EU summit in March. Meanwhile, financial markets will continue to worry that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.

“There are certainly signals that Germany is willing to consider it and it is rather geared towards March from the German side,” a senior euro zone official said.

The leaders announced that up to 20 billion euros of unspent funds from the EU’s 2007-2013 budget will be recycled towards job creation, especially among the young, and will commit to freeing up bank lending to small- and medium-sized companies.

But with no new public money available for a stimulus, they focused mainly on promoting structural reforms such as loosening labor market regulation, cutting red tape for business and promoting innovation.

(Additional reporting by Julien Toyer, Harry Papachristou and Robin Emmott in Brussels, Marius Zaharia, William James, Chris Wickham and Jeremy Gaunt in London,; Roberta Cowan in Amsterdam,; Writing by Paul Taylor; Editing by Mike Peacock)

AMBOISE, France (Reuters) – President Nicolas Sarkozy said on Sunday France could overcome its debt crisis as long as it was prepared to pull together to adopt economic reforms, two days after the country lost its prized triple-A credit rating.

Sarkozy said he would announce reforms at the end of the month and that he intends to implement them rapidly following talks with union leaders and employers this coming week.

“I will tell them (the French people) the important decisions that we need to take without losing any time,” he said in a speech to mark the 100th anniversary of the birth of Michel Debre, father of the constitution of France’s Fifth Republic.

“The crisis can be overcome provided we have the collective will and the strength to reform our country.”

Three months away from a presidential election, Sarkozy has turned his focus to growth, vowing to overhaul welfare financing, company labor charges and job flexibility, with plans for a so-called “Social VAT” to fund welfare and a tax on financial transactions.

The president is due to meet union leaders and employers for talks on Wednesday.

Sarkozy did not directly address the decision by Standard & Poor’s to cut France’s top-notch rating during the speech, despite criticism this weekend from opposition Socialist politicians who said it was his policies that had been downgraded, not France.

(Reporting by Yann Le Guernigou; Writing by James Regan; Editing by Matthew Jones)

PARIS (Reuters) – The loss of France’s much-prized triple-A credit rating three months from elections that will likely hinge on the handling of the economy is a bitter blow for French President Nicolas Sarkozy, who had made the top-notch grade a badge of honor.

Sarkozy is likely to use the fact the Standard & Poor’s downgrade was not two notches, as happened to some other eurozone countries, as a way of drawing a line in the sand as he prepares a raft of reforms focused on growth.

Stuck with some of the lowest popularity ratings of any French president, Sarkozy rushed through two sets of austerity measures late last year in a last-ditch attempt to save the triple-A rating and keep down borrowing costs.

But since the start of the year, having apparently resigned himself to a downgrade, Sarkozy has switched his focus to growth, vowing to overhaul welfare financing, company labor charges and job flexibility, with plans for a so-called “Social VAT” to fund welfare and a tax on financial transactions.

Prime Minister Francois Fillon played down the impact of the downgrade on Saturday but said it underscored the need to press on with its reform plans focused on competitiveness and growth.

“This decision is a warning that should not be turned into a drama any more than it should be underestimated,” Fillon said. “Because the drifting off course of our public finances in the last 30 years is a major handicap for growth and employment, as well as for our national sovereignty.”

Sarkozy — who thrives on handling a crisis — meets union leaders and employers for talks on January 18 and has vowed to come out with some kind of deal on reforms.

The French downgrade came as S&P cut a swathe of euro zone countries, blaming insufficient policy measures by the bloc’s leaders. While it leaves France a notch below Germany, which kept its AAA status, the ratings of Italy, Spain, Portugal and Cyprus were downgraded by a costly two rungs.

SARKOZY’S OPPONENTS SEIZE ON DOWNGRADE

France has 1.3 trillion euros ($1.65 trillion) of outstanding debt and will issue up to 178 billion euros in medium and long-term paper this year, net of buybacks, to cover its deficit and expiring debt. Economists say the cut to an AA+ rating may have a limited impact on debt-servicing costs, however, given historically low French yields.

Opposition Socialist politicians have seized on Friday evening’s downgrade to criticize Sarkozy’s handling of the economy, however, blaming it directly on his policies.

“Nicolas Sarkozy made keeping the triple-A a political objective and even called it an obligation for his government,” Socialist presidential candidate and opinion poll frontrunner Francois Hollande told a press conference on Saturday.

“This battle has been lost. And this brings into question the credibility of the strategy implemented since 2007,” he said, adding that it was Sarkozy’s policies, not France, that had been downgraded.

The long-feared move, which may yet be followed by other rating agencies, comes as faltering economic growth has left French public finances looking vulnerable to shocks from the banking sector or debt-laden euro zone peripherals. France had the highest debt-to-gross-domestic-product ratio of the euro zone countries rated AAA before Friday’s decision.

Centre-right Sarkozy is lagging Hollande by 10 points ahead of the two-round election on April 22 and May 6, according to an opinion poll this week.

A separate survey by pollster Ipsos in December found that 54 percent of respondents thought that losing the triple-A rating would be serious for France.

The rating cut dominated Saturday’s newspapers, with the left-leaning Liberation blazing below a front-page headline “S_RKOZY” that the president had lost an “A.”

Critics say Sarkozy had failed to match the economic policy successes of the mightier Germany and was also failing to resolve the euro zone’s devastating debt crisis.

“The economic policies, the fiscal policies have ended up in this level of debt, which is making us considerably weaker in the current crisis,” Hollande ally Jerome Cahuzac, head of the National Assembly finance committee, told France Info radio.

($1 = 0.7895 euros)

(Reporting by James Regan; Editing by Catherine Bremer and Matthew Jones)

BERLIN/ATHENS (Reuters) – Standard & Poor’s downgraded the credit ratings of nine euro- zone countries, stripping France and Austria of their coveted triple-A status but not EU paymaster Germany, in a Black Friday the 13th for the troubled single currency area.

“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” the U.S.-based ratings agency said in a statement.

In a potentially more ominous setback, negotiations on a debt swap by private creditors seen as crucial to avert a Greek default that would rock Europe and the world economy broke up without agreement in Athens, although officials said more talks are likely next week.

If Greece cannot persuade banks and insurers to accept voluntary losses on their bond holdings, a second international rescue package for the euro zone’s most heavily indebted state will unravel, raising the prospect of bankruptcy in late March, when it has to redeem 14.4 billion euros in maturing debt.

S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.

The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.

It put 14 euro-zone states on negative outlook for a possible further downgrade, including France, Austria, and still triple-A-rated Finland, the Netherlands and Luxembourg.

Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.

French Finance Minister Francois Baroin, speaking after an emergency meeting with President Nicolas Sarkozy, played down the impact of Europe’s second-biggest economy being downgraded to AA+ for the first time since 1975.

“This is not a catastrophe. It’s an excellent rating. But it’s not good news,” Baroin told France 2 television, saying the government would not respond with further austerity measures.

The euro fell by more than a cent to $1.2650 on the news. European stocks, which had been up for the day, turned negative, but reaction to the widely anticipated news was moderate. Safe-haven German 10-year bond futures rose to a new record high while the risk premium that investors charge on French, Spanish, Italian and Belgian debt widened.

Euro-zone finance ministers responded jointly by saying in a statement they had taken “far-reaching measures” in response to the sovereign debt crisis and were accelerating reforms toward stronger economic union.

Greek negotiators, who have repeatedly voiced confidence in a deal in which private creditors would accept writedowns of 50 percent of the face value of their bond holdings, said they were now less hopeful, warning of “catastrophic consequences” for Greece and Europe if they failed.

“Yesterday we were cautious and confident. Today we are less optimistic,” a source close to the Greek task force in charge of the negotiations said.

The Institute for International Finance, negotiating on behalf of banks, said: “Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.

The two sides are divided principally over the interest rate that Greece will end up paying, which determines how much of a hit banks take. While both appear to be engaged in brinkmanship, there are also doubts about the take-up rate of any voluntary deal, since some hedge funds have bought up Greek debt and want to be paid out in full or trigger default insurance.

The double blow of the S&P news and the stalling of the Greek debt talks came after a brighter start to the year with Spain and Italy beginning their marathon debt rollover at lower borrowing costs this week.

The European Central Bank’s move last month to flood banks with cheap three-year liquidity helped ease a worsening credit crunch and provided funds that governments hope some will use to buy sovereign bonds.

RESCUE FUND WEAKENED

S&P said the euro zone faced stresses, including tightening credit conditions, rising risk premiums for a growing number of sovereigns, simultaneous deleveraging by governments and households, and weakening economic growth prospects.

It also cited political obstacles to a solution to the crisis due to “an open and prolonged dispute among European policymakers over the proper approach to address challenges.”

Austerity and budget discipline alone were not sufficient to fight the debt crisis and risked becoming self-defeating, the ratings agency said.

German Finance Minister Wolfgang Schaeuble played down the news, saying: “In the past months, we’ve come to agree that the ratings agencies’ judgments should not be overvalued.”

France and Austria were at risk because of their banks’ exposure to the debt of peripheral euro-zone countries and Hungary respectively, as well as the weakening economic outlook for Europe. Italy and Spain face historically high borrowing costs.

The cut in France’s rating is a serious setback for the center-right Sarkozy’s chances of re-election in May and could weaken the euro zone’s rescue fund, reducing its ability to help countries in difficulty.

France is the second-largest guarantor of the European Financial Stability Facility, which has a AAA rating.

John Chambers, chairman of S&P’s sovereign rating committee, said preserving that status would require the four remaining AAA-rated guarantors to increase their commitments.

That could prove politically unpopular. Voters in Germany, Finland and the Netherlands have resisted lending more support to what they consider less prudent euro-zone countries.

Preserving that status would require members to increase their guarantees, which could prove politically unpopular.

In their statement, the euro-zone finance ministers said they would do all they could to ensure the rescue fund keeps its top rating.

After vowing for months to do everything to preserve Paris’ top-notch standing, Sarkozy appeared to prepare voters last month for the loss of the prized status before the election.

His political opponents pounced on the S&P decision as a verdict on the failure of his policies.

“This is in reality a double downgrade. It is a downgrade of our sovereign rating that will affect the country’s reputation, with heavy consequences, and it is also a downgrade compared to our main neighbor, Germany, with which we had equal status up to now,” centrist candidate Francois Bayrou said.

Socialist party leader Martine Aubry said: “Mr Sarkozy will be remembered as the president who downgraded France.”

It is not clear how far the downgrade will increase France’s borrowing costs, since markets have already anticipated the prospect by raising the French risk premium over German Bunds.

“One notch is priced in, but not more. The Franco-German spread can widen. It is about 130 basis points for the 10-year bond. The maximum level reached was 180 to 190 basis points and it can go back to this level,” said Alessandro Giansanti, senior rates strategist at ING in Amsterdam.

(Additional reporting by Reuters euro zone bureaux; Writing by Paul Taylor; Editing by Mike Peacock and Jan Paschal)

BERLIN/ATHENS (Reuters) – Standard & Poor’s downgraded the credit ratings of nine euro zone countries, stripping France and Austria of their coveted triple-A status but not EU paymaster Germany, in a Black Friday 13th for the troubled single currency area.

“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” the U.S.-based ratings agency said in a statement.

In a potentially more ominous setback, negotiations on a debt swap by private creditors seen as crucial to avert a Greek default that would rock Europe and the world economy broke up without agreement in Athens, although officials said more talks are likely next week.

If Greece cannot persuade banks and insurers to accept voluntary losses on their bond holdings, a second international rescue package for the euro zone’s most heavily indebted state will unravel, raising the prospect of bankruptcy in late March, when it has to redeem 14.4 billion euros in maturing debt.

S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.

The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.

It put 14 euro zone states on negative outlook for a possible further downgrade, including France, Austria, and still triple-A rated Finland, the Netherlands and Luxembourg.

Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.

French Finance Minister Francois Baroin, speaking after an emergency meeting with President Nicolas Sarkozy, played down the impact of Europe’s second biggest economy being downgraded to AA+ for the first time since 1975.

“This is not a catastrophe. It’s an excellent rating. But it’s not good news,” Baroin told France 2 television, saying the government would not respond with further austerity measures.

The euro fell by more than a cent to $1.2650 on the news. European stocks, which had been up on the day, turned negative but reaction to the widely anticipated news was moderate. Safe-haven German 10-year bond futures rose to a new record high while the risk premium investors charge on French, Spanish, Italian and Belgian debt widened.

Euro zone finance ministers responded jointly by saying in a statement they had taken “far-reaching measures” in response to the sovereign debt crisis and were accelerating reforms towards stronger economic union.

Greek negotiators who have repeatedly voiced confidence in a deal in which private creditors would accept writedowns of 50 percent of the face value of their bond holdings said they were now less hopeful, warning of “catastrophic consequences” for Greece and Europe if they failed.

“Yesterday we were cautious and confident. Today we are less optimistic,” a source close to the Greek task force in charge of the negotiations said.

The Institute for International Finance, negotiating on behalf of banks, said: “Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.

The two sides are divided principally over the interest rate Greece will end up paying, which determines how much of a hit banks take. While both appear to be engaged in brinkmanship, there are also doubts about the take-up rate of any voluntary deal, since some hedge funds have bought up Greek debt and want to be paid out in full or trigger default insurance.

The double blow of the S&P news and the stalling of the Greek debt talks came after a brighter start to the year with Spain and Italy beginning their marathon debt rollover at lower borrowing costs this week.

The European Central Bank’s move last month to flood banks with cheap three-year liquidity helped ease a worsening credit crunch and provided funds which governments hope some will use to buy sovereign bonds.

RESCUE FUND WEAKENED

S&P said the euro zone faced stresses including tightening credit conditions, rising risk premiums for a growing number of sovereigns, simultaneous deleveraging by governments and households and weakening economic growth prospects.

It also cited political obstacles to a solution to the crisis due to “an open and prolonged dispute among European policymakers over the proper approach to address challenges.”

Austerity and budget discipline alone were not sufficient to fight the debt crisis and risked becoming self-defeating, the ratings agency said.

German Finance Minister Wolfgang Schaeuble played down the news, saying: “In the past months, we’ve come to agree that the ratings agencies’ judgments should not be overvalued.”

France and Austria were at risk because of their banks’ exposure to the debt of peripheral euro zone countries and Hungary respectively, as well as the weakening economic outlook for Europe. Italy and Spain face historically high borrowing costs.

The cut in France’s rating is a serious setback for the centre-right Sarkozy’s chances of re-election in May and could weaken the euro zone’s rescue fund, reducing its ability to help countries in difficulty.

France is the second largest guarantor of the European Financial Stability Facility, which has a AAA rating. Preserving that status would require members to increase their guarantees, which could prove politically unpopular.

In their statement, the euro zone finance ministers said they would do all they could to ensure the rescue fund keeps its top rating.

After vowing for months to do everything to preserve Paris’ top-notch standing, Sarkozy appeared to prepare voters last month for the loss of the prized status before the election.

His political opponents pounced on the S&P decision as a verdict on the failure of his policies.

“This is in reality a double downgrade. It is a downgrade of our sovereign rating that will affect the country’s reputation, with heavy consequences, and it is also a downgrade compared to our main neighbor, Germany, with which we had equal status up to now,” centrist candidate Francois Bayrou said.

Socialist party leader Martine Aubry said: “Mr Sarkozy will be remembered as the president who downgraded France.”

It is not clear how far the downgrade will increase France’s borrowing costs, since markets have already anticipated the prospect by raising the French risk premium over German Bunds.

“One notch is priced in but not more. The Franco-German spread can widen. It is about 130 basis points for the 10-year bond. The maximum level reached was 180 to 190 basis points and it can go back to this level,” said Alessandro Giansanti, senior rates strategist at ING in Amsterdam.

(Additional reporting by Reuters euro zone bureaux; Writing by Paul Taylor, editing by Mike Peacock)