Eurozone seeks bailout funds from China

Sat, 29 October 2011

The head of the eurozone's bailout fund is beginning attempts to persuade China to invest in a scheme to help rescue member countries facing debt crises.

After meeting Chinese leaders, Klaus Regling said there were no formal negotiations and would be no deal now.

It is thought China may pay about 70bn euros ($100bn) into the fund, which is expected to be boosted to 1tn euros.
Meanwhile French President Nicolas Sarkozy said debt-ridden Greece's entry to the eurozone was a mistake.
Greece was "not ready" when it joined in 2001, he said, adding that it could be rescued thanks to a new deal on the debt crisis.

European leaders worked into the early hours of Thursday in Brussels to secure an agreement aimed at preventing the crisis from spreading to larger eurozone economies.
The deal triggered a worldwide shares rally.
'Regular buyer'
Beijing has made it clear that it will demand strong guarantees on the safety of any contribution it might make.

Mr Regling, who is chief executive of the European Financial Stability Facility (EFSF), said he was not negotiating with China as a potential investor but holding consultations to decide the terms for raising the money.
"Don't expect any precise outcome of our talks," he said, quoted by AFP news agency.
"I cannot say today, and it's certainly far too early to say what kind of amounts might be envisaged."

He said China had been a regular buyer of EFSF bonds in the past.
He would present the fund's bonds as a potential commercial investment to China, he said, adding that Beijing regularly needed to find safe investments for its trade surpluses.
"I am optimistic that we will have a longer term relationship," he said.
Chinese Vice Finance Minister Zhu Guangyao said there was work still to be done.
"We need to wait for the technicalities to be clear and also to carry out serious studies before we can decide on investment," he said, quoted by AFP.
"We hope that all these technical and specialised arrangements can be thrashed out at an early date and can be implemented and feasible. That will be very important for the effectiveness" of the fund.

The President of the World Bank, Robert Zoellick, has said he believes China will invest in Europe only if there are incentives for it to do so.
"I don't think that China will just come in as a white knight to try to provide money just to bail out Europeans," he told the BBC.
But investor Jim Rogers said China was prepared to help.
"From China's point of view, it's cheap foreign aid. They'll buy goodwill. I guess they'll put up some money," he said on BBC Radio 4's Today programme.

The main provisions of Thursday's deal are:
The framework for the new EFSF bailout fund is to be put in place in November.
Germany, as the largest economy in eurozone, is expected to be the largest contributor.
Asian markets rose for a second day on Friday and bank stocks in Europe continued to rally, a day after the deal was reached.

source: HellenicShippingNews

Fresh fears of Greek default as Finns hold out in collateral dispute

August 26, 2011
By Riva Froymovich, The Australian

EURO-ZONE policy makers appeared no nearer to settling a dispute over Finland's collateral demands in exchange for participating in a bailout for Greece, raising concerns that Athens may default.

Markets have grown more worried about the potential for a Greek debt default amid an apparent lack of progress in resolving the collateral issue this week.

Finland, meanwhile, shows no sign of backing down.

German Chancellor Angela Merkel also unexpectedly cancelled a trip to Russia in early September to shepherd through parliament a crucial change to the euro-zone bailout fund.

The cancellation comes at a sensitive time for relations with Russia, and amid growing nervousness about dissent within the ranks of her own party over her handling of the euro-zone debt crisis.

"The date collides with the introduction of the (European Financial Stability Facility) treaty into the Bundestag," a German government official said, adding that the chancellor wants to stay in Berlin due to the significance of the issue.

Yields on Greek two-year bonds rocketed to a record of over 43 per cent, according to Tradeweb, and the cost of insuring Greek government bonds against default also rose sharply.

Greek five-year sovereign credit-default swaps were 1.37 percentage points wider at 22.75 percentage points, according to Markit.

No multi-lateral talks on the collateral issue took place Wednesday or Thursday, a person familiar with the situation said, despite an initial intention to hash out an agreement by the weekend.

However, the person didn't rule out the possibility that bilateral talks are under way.

Euro-zone governments are looking into alternative forms of collateral after a cash deal reached earlier between Greece and Finland was rejected by key member countries, including Germany and the Netherlands.

Under terms of that deal, Greece would pay Finland hundreds of millions of euros from its bailout loans as collateral for those same loans at the expense of other euro-zone countries.

Since Finland is set to contribute just 2 per cent of Greece's total rescue package, guarantees from the richer euro-zone nations would be going directly to Finland.

The collateral dispute, if not resolved soon, could derail a second bailout package for Greece agreed by euro-zone leaders on July 21.

Without support from all 17 euro-zone countries, no funds can be released, while changes to the European Financial Stability Facility, the currency bloc's bailout fund, can't go forward either.

At last month's summit, leaders agreed to expand the fund and make it more flexible, so that it could buy bonds on the secondary market and provide credit lines to countries locked out of markets.

National parliaments across the euro area must approve the changes, however, and the collateral issue must be settled before the final EFSF proposal is written.

The European Commission, the EU's executive branch, has asked that all the details for the EFSF legislation be clarified by the end of August.

German officials have said they expect to approve the new EFSF at a cabinet meeting on Wednesday.

A parliamentary vote is likely to take place September 23.

A commission spokesman said that there is no formal deadline for concluding talks.

Still, "it's good for that to be done toward the end of the month," he said.

Germany insists on a solution acceptable to all euro-zone countries.

The International Monetary Fund, which has been contributing to Greek bailout loans, opposes any deal that would threaten its preferred-creditor status, which ensures the fund is always first to be repaid.

Finland said that it continues discussions with Greece and other euro-zone countries to find a solution. Officials refrained from further comment.

"The issue has become so politicised that no one here at the Finance Ministry wants to talk about it at the moment," said Anita Sihvola, a spokeswoman for the Finnish finance ministry.

On Wednesday, Finnish Finance Minister Jutta Urpilainen reiterated that Finland would not take part in the €110 billion Greek ($150bn) bailout unless it obtained collateral.

Finland's policy is partly the result of April's general election, in which support for the True Finns Party, which opposed the Greek bailout, soared to 19 per cent from 4.1 per cent in 2007.

The True Finns finished third, and the election led to a new government coalition of six parties.

Euro-zone officials have indicated they are exploring other forms of collateral, such as state property or other non-cash assets.

But this option would be anathema in Greece, especially as many of the government's assets are already earmarked for privatisation.

The government has strongly opposed any deals that would involve putting up Greek land or real estate as collateral, viewing the step as a threat to the country's territorial sovereignty.

"It seems that a possible outcome is either collateral for all member states or no country will get it," said a second person familiar with the matter.

Euro zone crisis reaches France, turns existential

Aug12, 2011 |By Paul Taylor, Reuters

PARIS (Reuters) - It was the week the euro zone debt crisis reached France, one of the twin pillars of the European currency alongside Germany.

As jitters over Paris' prized top-notch AAA credit rating took hold, President Nicolas Sarkozy returned from the beach to order up new austerity measures. Then panic selling of French bank shares and an abrupt halt to economic growth added to France's plight.

The sight of the euro zone's number two economy buffeted by rumours and investor anxiety in the midst of the holiday season raised existential questions about European monetary union that will confront Sarkozy and German Chancellor Angela Merkel when they meet in Paris next Tuesday.

The fragile edifice of support for weaker European states would start to crumble if France, the second contributor to the euro zone's rescue fund, were to face a debt downgrade.

All three major ratings agencies reaffirmed this week that no such downgrade was in the works, but that didn't suffice to calm markets.

Up to now, Sarkozy has projected himself as an energetic statesman orchestrating the rescue of the euro zone. Suddenly he had to turn to crisis management at home.

This week's perfect summer storm wiped 10 billion euros off French banks' market value and left France looking at times like the country in need of help itself.

The disclosure that the economy failed to grow at all in the second quarter, after a healthy 0.9 percent spurt in Q1, amplified concerns about the government's ability to meet its target of cutting the deficit to 5.7 percent of GDP this year.

Worryingly, household consumption fell by the biggest amount in a decade, suggesting consumers are reining in spending because they fear hard times and higher taxes ahead.

UNPALATABLE CHOICES

Just eight months before the first round of a presidential election, Sarkozy faces unpalatable choices between removing more tax breaks to increase revenue and cutting public spending, both of which could further depress anaemic growth.

The centre-right president has tried to upstage his Socialist opposition by proposing to introduce a German-style fiscal rule on deficit reduction in the constitution. Socialist votes would be needed to achieve the required super-majority.

Socialist leaders have refused so far to cooperate with what they call Sarkozy's "trap" and sought instead to blame him for increasing the deficit with tax give-aways for the rich.

The issue is bound to be one of the major battlegrounds of the campaign for the presidential election next April and May.

Sarkozy's approval ratings have improved since Socialist front-runner and former IMF head Dominique Strauss-Kahn was forced out the race after his arrest in New York on sexual assault charges.

But both main contenders for the Socialist nomination, Francois Hollande and Martine Aubry, are still ahead of the president in the polls at the moment.

IRRATIONAL AND RATIONAL

French authorities are still not entirely sure what hit them this week. There were both rational and irrational reasons for the market attack.

When Standard & Poor's knocked the United States off its triple-A perch last Friday, markets started looking for who else might be in line, turning a spotlight on France, with the biggest debt and deficit ratios among the six AAA-rated euro zone countries.

Economist Jacques Attali, a former top aide to President Francois Mitterrand, noted that S&P had specifically compared France with the United States, saying it was the only other AAA country that would have a similar debt ratio in 2015.

"Contrary to what everyone says, we are explicitly singled out," Attali told the daily Le Monde in an interview.

"Hence we must a bring our debt down below 85 percent of GDP by the end of 2013, and get back to 70 percent in this decade. That won't be easy."

The cost of insuring French public debt against default reached a new peak during the week yet by Friday, France's 10-year bond yield had fallen back below 3 percent for the first time since November 2010, hardly a sign of imminent meltdown.

The country does have an Achilles' heel: stress tests have shown that its banks are among the most heavily exposed to debt in the euro zone periphery, particularly Greece and Italy.

The sight of the European Central Bank buying Italian bonds on the secondary market to prevent Rome's borrowing costs rising to unsustainable levels, and reports that Greece's debt swap would be extended to bonds maturing up to 2024, combined with wild market rumours to hit French lenders.

Shares in Societe Generale plunged as much as 23 percent on Wednesday before closing 15 percent lower. BNP Paribas and Credit Agricole suffered lesser hits.

A senior SocGen executive told Reuters the bank was worried that heightened market tensions culd lead to a 2008-type credit crunch in which banks stop lending to one another.

French regulators, joined by their Italian, Spanish and Belgian counterparts, banned short-selling of financial shares on Thursday in a temporary response to try to halt rumour-driven herd behaviour. Bank shares rose modestly on Friday.

A senior risk manager at a large European bank, speaking on condition of anonymity, said one reason for the losses on French and European bank shares was that short sellers were targeting banks instead of government bonds.

"Because it's increasingly difficult to trade CDS on sovereign debt, short sellers take bank shares as proxy for sovereign bonds of the respective countries. If you bet on losses of French sovereign bonds for instance, short selling of French banks is very promising," he told Reuters.

Under cover of anonymity, several traders and government officials suggest hedge funds had shorted French debt in anticipation of a downgrade and turned on the banks when it became clear this was not going to happen.

A French fund manager said he clearly witnessed a "France bashing session" on Wednesday.

He said a U.S. bank had sent a market-wide message citing six reasons to sell shares of a French investment firm. The reasons invoked were "because it is French", six times.

France holds emergency meeting on debt crisis

Thu, August11, 2011 |English.news.cn

BEIJING,Aug 11 (Xinhuanet) – Markets around the world rallied, and we were just starting to relax. But don't get too comfortable. Another curveball has been thrown our way. Our top story tonight - French President Nicolas Sarkozy is now worried about HIS nation's triple A credit rating.

That's right - Sarkozy is worried France may be the next victim of eurozone's debt crisis - or, depending on how you look at it - victim of the rating agencies. He held an emergency meeting earlier Wednesday, with his key ministers and central bank chief Christian Noyer, on the current volatile global economic situation.

Sarkozy says the country is preparing new measures to ensure it meets its deficit-reduction targets, which analysts say is part of France's efforts to retain its top-notch triple-A rating. The French president notes the deficit-reduction targets are imperative and will be met, regardless of the evolution of the economic outlook.

The meeting comes amid new fears that France, Europe's second largest economy, may be the next nation to face contagion from the eurozone's debt crisis.

Meanwhile, French Finance Minister Francois Baroin says the government will meet in August, to examine new measures to cut its public deficit.

(Source CNTV)

World stocks hit fresh 11-month low; down 20 pct since May

Tue Aug 9, 2011

LONDON (Reuters) - World stocks hit a 11-month low on Tuesday, entering bear market territory as it fell more than 20 percent since hitting a three-year high in May.

Investors grew concerned about the health of the U.S. economy, the euro zone debt crisis and higher inflation in China.

The MSCI all-country equity index fell nearly 2 percent on the day to its lowest since September 2010. The index has fallen for 10 consecutive days.

The MSCI emerging equity index fell 3.4 percent towards July 2010 lows hit in Asian trade.

(sourced Reuters)

Britain, other eurozone countries face ratings cut: Jim Rogers

By Kevin Lim and Harry Suhartono, Reuters

8 Aug, 2011

SINGAPORE (Reuters) - Britain and several euro zone countries are likely to have their credit ratings cut in coming months as debt problems worsen, and Western policymakers are bound to embark on more quantitive easing to get their economies moving, American investor Jim Rogers said on Monday.

He also said Standard & Poor's acted too slowly in stripping the United States of its AAA rating on Friday, and that he remained bullish on commodities as investors turn to real assets amid fears of further quantitative easing by the U.S. and European central banks.

"The idea that the U.S. is downgraded and the UK is not is lunacy. There are many countries, Belgium, Spain, lots of countries in Europe, that should be downgraded just as the U.S. has been downgraded," Rogers said in an interview with Reuters Insider.

Rogers, who co-founded the Quantum Fund with George Soros in the 1970s, is a well-known investor and public speaker known for his bullish views on commodities and China. He now lives in Singapore.

Rogers said he has long positions on agriculture, gold and other commodities and is short on emerging market equities, government bonds and large U.S. financial institutions.

Despite the recent falls in commodity prices and U.S. Treasury yields, he said his positions remained healthy as the losses were offset by gains on his short positions.

Rogers predicted Western governments will embark on a new round of quantitative easing to help spur their moribund economies, as politicians and other policymakers were not prepared to go through the pains of bankruptcy.

"They'll try to disguise it. They'll call it cupcakes or who knows what. It'll cause a big rally in raw materials and commodities because more and more people will realise they are printing money, they are debasing the currency."

CHINA, EUROPE

In contrast, Rogers said China was doing the right thing in trying to cool its economy and combat inflation.

"Is it going to be fun? No, some real estate investors are going to go broke in Shanghai and other parts of China. But that's not the end of the world, that's not the end of the Chinese economy. Things may slow down but China's not going to fall off the face of the world."

Rogers called on European politicians and bureaucrats to face reality and let weak eurozone governments default, and "the people who made the bad loans lose money."

"The idea of printing more money and buying up worthless bonds instead of forcing people to go bankrupt is ludicrous."

"In America, we had states and cities go bankrupt, many times. It didn't end the United States, it didn't end the U.S. dollar. It caused some pain, some terrible pain. But that's how you solve problems."

"You start over from a stronger base, after you acknowledge your mistakes... That's what capitalism is all about."

Moody’s Cuts Ireland Rating Two Levels, Outlook Negative

Apr 15, 2011 1:19 PM GMT+0530
By Finbarr Flynn and Dara Doyle

Ireland’s credit rating was cut two levels by Moody’s Investors Service to the lowest investment grade as the government struggles to lower the budget deficit and restore economic growth.

Moody’s reduced the rating to Baa3 from Baa1, leaving the country’s outlook on negative, according to an e-mailed statement today. That’s the same rating as Iceland, Tunisia, Romania and Brazil. Standard & Poor’s on April 1 cut Ireland’s rating one level to BBB+ with a stable outlook.

Irish taxpayers may spend as much as 100 billion euros ($145 billion) trying to solve Europe’s worst banking crisis as the country draws funds from last year’s bailout. Ireland is trying to convince investors at home and abroad it has finally plugged the hole in its lenders after four failed attempts following the collapse of the country’s property boom in 2007.

Irish debt restructuring is not a “plausible scenario,” Dietmar Hornung, a Frankfurt-based analyst at Moody’s, said in a telephone interview today. The country has a “good track record of delivering” fiscal consolidation, while the negative outlook reflects the “unbalanced risks” facing the nation.
‘Significant Threats’

The extra yield investors demand to hold Irish rather than German 10-year bonds has narrowed to 596 basis points from 687 basis points since central bank Governor Patrick Honohan disclosed on March 31 how much additional capital the country’s lenders need.

Fitch Ratings yesterday affirmed Ireland’s BBB+ rating and removed the threat of a downgrade, calling latest efforts to resolve the banking crisis “credible.” The ratings company maintained a negative outlook, citing “significant threats to an economic recovery and fiscal consolidation.”

Ireland’s central bank yesterday forecast gross domestic product to rise 0.9 percent this year, saying consumer demand will remain “subdued” as the government cuts spending. The European Central Bank last month projected the 17-member euro- region economy will expand about 1.7 percent in 2011.

“The country’s weak economic growth prospects are driven by the fiscal consolidation process, the ongoing contraction in private-sector credit, and a more adverse interest-rate environment,” Moody’s said. “The Irish government’s financial strength could decline further if economic growth were to be weaker than currently projected, or if fiscal adjustment were to fall short of the government’s planned consolidation path.”
‘Uncomfortable’ Place

Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London, said in an e-mailed note today that Ireland is now in the “most uncomfortable of places to be on the ratings scale, one false step from junk.”

Ireland’s government has injected about 46 billion euros into banks and taken majority stakes in four of them. Honohan said on March 31 it is realistic to expect Bank of Ireland Plc and Irish Life & Permanent Plc, the two lenders not already owned by the government, to fall under state control.

Finance Minister Michael Noonan said last month Ireland can sustain mounting debt levels if it fixes its lenders and maintains economic growth.

Other euro-region governments are also seeking ways to lower budget deficits and restore investor confidence. S&P last month cut Portugal for the second time in a week to the lowest investment-grade rating of BBB-. The country last month became the third euro nation after Greece and Ireland to ask for aid.

European Union Economic and Monetary Affairs Commissioner Olli Rehn said yesterday that a debt restructuring in the euro region could cause a “chain reaction through the banking sector,” calling the environment still “fragile.”

“The downgrade is disappointing to say the least,” Bloxham Stockbrokers analysts including Dublin-based Alan McQuaid said in an e-mailed note today. “However, given the ongoing uncertainty over Ireland’s fiscal position, it is not altogether surprising.” (sourced Bloomberg)

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Gold rises as MidEast, euro quell risk appetite

Wed Mar 9, 2011 12:50pm GMT

* Gold edges up, Middle East, euro zone in focus
* China adviser says Beijing should buy more gold
* Coming Up: Germany Industrial output Jan; 1100 GMT

By Amanda Cooper

LONDON, March 9 (Reuters) - Gold rose on Wednesday, supported by investor concern over the violence across the Middle East and the resurgence of discomfort over the euro
zone's finances ahead of a key summit this week.

Crude oil arrested a two-day slide as worries about the turmoil in the Arab world, where pro-democracy protests are spreading from Libya to Yemen and Kuwait, outweighed
reassurances from OPEC of ample spare capacity.

The euro fell below its recent four-month highs against the dollar, as investors shifted their attention away from the prospect of an imminent rate rise to the region's debt problems,
which leaders from the single currency bloc will discuss at a summit on Friday.

Euro-priced gold XAUEUR= was set for a fourth daily rally, its strongest run in two months.

Gold priced in dollars XAU= rose 0.4 percent to $1,433.30 an ounce by 1224 GMT, reversing the net loss for the week, which would have been the first since late January.

COMEX April futures GCJ1 rose 0.5 percent to $1,433.90. "I could see (the price) down another $10 but you have to continue buying," said ANZ head of metal sales Peter Hillyard.

"There are bigger macro issues, to do with economies and recessions and double-dips and the Middle East. There are enough bullish factors in play that if it isn't one, it will be another
and on balance, the market is looking for those bullish signs."

ETFS RISE

Reflecting investor appetite for gold was another pickup in holdings of the metal in some of the world's largest exchange-traded funds, which have risen by over 340,000 ounces
so far this week to over 61 million ounces.

Gold has risen by nearly 10 percent in the last seven weeks, since protests in Tunisia and Egypt spread to other parts of the Middle East and North Africa, triggering a 20-percent rise in
crude oil and raising concern over the chances of an oil-price shock to the global economic recovery.

The price hit a record $1,444.40 an ounce on Monday and has since retreated by about 1 percent from that level, in line with the drop in the oil price, which often trades in tandem with
gold, especially if investors are seeking safe-haven assets.

"I feel it is consolidating, waiting for any lead out of Libya. We'll see what happens on (Friday) prayer day around the Gulf, and then we'll see whether or not there is need for
concern. I think that's the focus we have to follow," said Jonathan Barratt, managing director of Commodity Broking Services in Melbourne.

"If nothing happens on Friday, then I feel it will be a sigh of relief that the contagion won't actually spread. As a result of that, if we don't see it spread, then gold would come under
pressure."

Tensions in Libya remained. Tanks and warplanes intensified their offensive against rebels on Tuesday, as the United States stressed that any no-fly zone to hobble Muammar Gaddafi's forces had to have global backing.

Separately, a Chinese government adviser was quoted by local media reports as saying that the second largest consumer of the precious metal should use some of its $2.85 trillion foreign
exchange reserves to buy more gold.

"Another supportive factor for gold demand and therefore gold prices are likely to be repeated calls for the diversification of China's currency reserves," said Commerzbank analysts in a daily note.

Silver rallied for a fourth day, rising 0.6 percent to $36.22 an ounce, supported by the gains in gold and the ongoing backwardation across the silver futures curve <0#si:>, as well as by continued inflows into ETFs.

Platinum XPT= rose 0.6 percent to $1,813.62 an ounce, while palladium XPD= gained 0.9 percent to trade at $796.47. (Additional reporting by Lewa Pardomuan in Singapore; editing
by James Jukwey, sourced :Thomson Reuters)

Greek PM seeks consensus on economy in meetings with opposition party leaders

Wed, Mar08, 2011 23:55:28

ATHENS, March 8 (Xinhua)-- Prime Minister George Papandreou said Tuesday he will seek national consensus on dealing with the Greek debt crisis in a series of meetings with opposition parties and through a "comprehensive package solution" in the European Union.

"We need responsibility from all political forces. We are determined to support in Brussels that the only solution on the current crisis in Greece and Europe is a comprehensive package solution. Otherwise, there is no solution. On this basis I will fight," Papandreou said during talks with main opposition New Democracy (ND) Party leader Antonis Samaras.

Stressing that his government respects different views, the prime minister asked that parties on the right and left support his stance ahead of a crucial extraordinary summit of eurozone-member states Friday in Brussels and the March 24-25 EU summit.

Samaras on his part, noted that the ND always stood for national consensus in difficult times. He repeated his party's stance that Greece should change policies and re-negotiate terms of the memorandum signed last May with the EU and International Monetary Fund in order to secure a multi-billion euro rescue package to avoid default.

Local analysts expect similar responses in separate meetings later Tuesday from the leaders of other parties represented in parliament, such as the Greek Communist Party (KKE) and the Popular Orthodox Rally (LAOS).

Papandreou was also scheduled to hold talks with non-parliamentary Democratic Alliance and Democratic Left parties' leaders later Tuesday, before flying to Paris to meet French President Nicolas Sarkozy on Wednesday ahead of the EU summits.

Experts in Athens said that during talks with Sarkozy, Papandreou likely would try to secure support to convince German Chancellor Angela Merkel to accept an extension of the repayment period of the EU-IMF aid by Greece and lower interest rates.

During a cabinet meeting Monday, Papandreou stated his intention to seek a "comprehensive package solution" for the crisis in Brussels, leaving open the prospect of using veto power to block any other solution, clashing with Germany. Editor: yan

EU summit to take only minor steps on debt crisis

Mar8, 2011, 10:13 PM

By Luke Baker

BRUSSELS (Reuters) - Euro zone leaders will take the next cautious steps in their year-long effort to quell the region's debt crisis at a summit on Friday, but the meeting is unlikely to produce a breakthrough.

The top item on the agenda for the 17 heads of state and government is to agree a "competitiveness pact", a deal Germany and France are pushing the rest of the euro zone to adopt to show their commitment to overhauling their economies.

The pact has been watered down since it was put forward by German Chancellor Angela Merkel and France's Nicolas Sarkozy last month, and now looks likely to win approval from the rest of the euro zone leaders, many of whom were alarmed by the initial proposals.

The more stringent elements, such as a commitment to abandon inflation-linked wage increases, are likely to be dropped, but there should be agreement on measures to limit public deficits, gradually increase retirement ages to reflect demographics, and work towards a common corporate tax base.

Any agreement is likely be hailed by EU leaders -- particularly Germany and France -- as a major step forward in the battle to stem the debt crisis, which has already led to bailouts for Greece and Ireland and still threatens Portugal.

But analysts regard competitiveness as a sideline issue that barely nudges the euro zone closer to tackling the fundamental problems underpinning the crisis -- bad banking debts and heavily-indebted sovereign nations with poor growth prospects.

"The competitiveness pact as it stands is largely meaningless, it's beside the point right now," said Simon Tilford, chief economist of the Centre for European Reform, a London-based think tank.

"The immediate issue is debt restructuring and bank recapitalisation and they're not dealing with that."

Friday's summit is only likely to lay the ground for a meeting of all 27 EU leaders in Brussels on March 24-25, when they hope to agree on a "comprehensive package" of measures they hope will draw a line under the crisis.

PORTUGAL BACK UNDER PRESSURE

Measures under discussion as part of the comprehensive package include reforms to the European Financial Stability Facility (EFSF), the 440 billion euro fund set up last May and used to bail out Ireland, and the creation of the European Stability Mechanism, a permanent fund that will replace the EFSF from mid-2013, and more banking stress tests.

Among issues to be resolved is whether the effective capacity of the EFSF will be increased to its full 440 billion euros. Because of guarantees needed for the fund to retain its triple-A credit rating, its effective capacity is currently 250 billion euros.

If Germany gets the rest of the euro zone to sign up to the competitiveness pact on Friday, there is an expectation that that will make Berlin more disposed to agree to a strengthening of the EFSF, which almost all other euro zone members want.

But Merkel's political allies at home are adamantly opposed to bolstering the EFSF, which would require more taxpayer-backed guarantees, and neither do they want the fund to be used to buy distressed euro zone debt, as many other countries favour.

Merkel's coalition lost an important regional election in Hamburg last week and is expected to lose another in Baden-Wuerttemberg on March 27, piling pressure on the chancellor to stick closely to what voters want, which is no more German taxpayer funds being used for EU bailouts.

A month ago, an enlargement of the effective lending capacity of the EFSF looked likely, as did the possibility of the fund being used to buy distressed euro zone bonds on the secondary market, or to lend money to countries such as Greece and Ireland to buy back bonds. All now look questionable.

"The wiggle room, the political room for manoeuvre on the part of the Germans, is worryingly limited," said Tilford.

"They are going to have to deliver something (on March 24-25) because the market reaction otherwise could be pretty adverse, but I fear that very little is going to be delivered."

European leaders, particularly Herman Van Rompuy, the president of the European Council, have cast the end-March summit as a defining moment, when the euro zone finally gets on top of a crisis that has wrought turmoil for more than a year.

But because of German domestic politics, persistent disagreement among member states over the best course of action, and external factors such as the likelihood that the European Central Bank will raise euro zone interest rates next month, the crisis may be about to enter another, more uncertain phase.

For months Portugal has said that it does not need EU/IMF assistance and can continue to fund itself in the market. But if there is no breakthrough on March 24-25, the likelihood of Portugal needing a bailout will increase. Already the majority of EU states believe this will happen in April.

That points to a renewed round of pressure on the debt of peripheral or highly-indebted euro zone states, with not only Portugal, but Spain, Belgium and Italy in the picture.

"Portugal will be forced into a bailout and will subsequently, like Ireland and Greece, be forced to restructure its debt," said Tilford. "Portugal looks very vulnerable."

(Editing by Stephen Nisbet,sourced:Reuters)