World Races to Avert Crisis

By STEPHEN FIDLER And CHARLES FORELLE

Associated PressFrench President Nicolas Sarkozy gestures while speaking during a final press conference at an EU summit in Brussels on Saturday.

BRUSSELS—The European Union on Sunday was trying to assemble an audacious bailout plan running into hundreds of billions of euros in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide.

According to EU diplomats, finance ministers Sunday were discussing a potential package of €600 billion ($764 billion). The money would be available to rescue euro-zone economies that get into financial troubles, the diplomats said. The plan would consist of €440 billion of loans from euro-zone governments, €60 billion from a new EU fund created to help euro countries facing balance-of-payment problems, and €100 billion from the International Monetary Fund, the diplomats say. But they emphasized a final decision hadn’t been made past midnight in Brussels Sunday.

The giant bailout package reflects the gravity of the crisis gripping Europe and growing fears that the situation may grow so dire as to hamper the fragile rebound in the global economy. It would also cast aside long-held notions that each EU nation should manage its own finances, opening an era in which members of the common currency take on unprecedented responsibilities for each other’s fiscal troubles.

In an indication of gathering world-wide concern, the White House said President Barack Obama on Sunday spoke with French President Nicolas Sarkozy and German Chancellor Angela Merkel to urge “resolute action to build confidence in the markets.” Leaders of the Group of 20 major economies scheduled a telephone call for late Sunday to discuss the crisis.

With a self-imposed deadline to reach agreement before Asian markets opened Monday morning, ministers from all 27 EU nations aimed to assemble a package impressive enough to arrest spreading worries about the debt problems of euro-zone governments. Once confident they could quarantine Greece’s turmoil, the EU’s leaders are grappling with gathering worries about the debt problems of euro-zone governments such as Portugal, Spain and Italy.

Facing a darkening mood in markets, euro-zone leaders met in Brussels late Friday to seal a €110 billion bailout for Greece, then convened the ministers’ meeting Sunday to provide what Mr. Sarkozy called a “systemic response” to a “systemic crisis.”

The strains in markets have grown along with disappointment among investors over how European officials have handled the crisis in the months since it became clear Greece was having trouble refinancing its debts.

Last week, pressures began to build on European banks, where worries about their investment and loan exposure to Greece led to rising borrowing costs. It also sent the euro, the common currency of 16 EU countries, to its lowest levels since last March.

The European Central Bank was also expected to make an announcement, possibly to avert concerns about funding troubles at European banks, analysts said.

Spain and Portugal have decided to make additional spending cuts to bring down towering budget deficits more quickly, government representatives said.

Spain plans to cut its budget deficit to 9.3% of gross domestic product this year, from 11.2% in 2009, and to 6.5% in 2011. It had previously pledged to lower the budget deficit to 9.8% of GDP this year. Portugal plans to cut its budget deficit to 7.3% of GDP this year, compared with an earlier target of 8.3%. Last year’s budget deficit was 9.4% of GDP.

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ReutersFrench President Nicolas Sarkozy and German Chancellor Angela Merkel at a euro-zone summit in Brussels Friday.

Political uncertainties aren’t helping. In Germany, projections showed Ms. Merkel’s center-right alliance Sunday lost a crucial regional election amid a voter backlash against aid for Greece. That means her government is set to lose its majority in Germany’s upper house.

One complication Sunday was that, while the mechanisms were being designed for the 16 countries of the euro zone, they also need agreement from some of the other 11 EU countries that don’t use the common currency, such as the U.K.

Alistair Darling, the U.K. chancellor of the exchequer who attended the meeting, said Britain would back the balance-of-payments facility. But, he said, creating a “stability fund for the euro”—the larger part of the package—had to be “a matter for the euro-group countries.” London faces uncertainty of its own, with the Conservatives scrambling to put together a coalition government in the wake of last week’s inconclusive election.

With Sunday’s expected deal, the EU would signal that even the smallest members of the euro zone are too big to fail.

The measures being discussed in Brussels make clear how far the crisis is stretching the founding principles of the common currency. Those principles emphasize that each euro-zone country is committed to managing its own fiscal affairs.

This independence, however, has been one of the principal causes of the crisis, allowing Greece to build up government debts to levels that many investors deem unsustainable. To correct that flaw, euro-zone governments are growing more dependent on one another, a step likely to require much closer coordination over fiscal policy and penalties for spendthrift governments.

Until now, governments have resisted this interference with their independence to tax and spend as they choose. In the early days of the debate over the euro, Germany feared that by giving up the Deutsche mark, it would find itself pushed to yield its own fiscal rigidity in the name of the collective good.

Germany, in particular, saw to that.

The EU treaties contain a so-called no-bailout clause, which forbids the bloc or any member to “be liable for or assume the commitments of” another EU country. The treaties bar the European Central Bank from lending to countries or buying their debt directly. To get around these obstacles, European officials appear to be relying on vaguer parts of the treaties, or on novel interpretations.

Officials say “bilateral loans”—that is, lending from one country to another—are permitted because the lending countries aren’t actually purchasing existing debt. Or, they argue that a part of the treaties permitting assistance in case of “exceptional occurrences” can apply, even though it seems intended for use when the exceptional occurrence is a flood, fire or hurricane.

—Adam Cohen, Tom Lauricella and Laurence Norman
contributed to this article.