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By Jan Strupczewski and Dina Kyriakidou

MADRID/ATHENS, April 16 (Reuters) – Finance ministers

agreed in principle on Friday to create a permanent mechanism

to handle economic crises in the euro zone amid preparations

for an unprecedented aid package for debt-stricken Greece.

Ministers from the 16 countries in the euro zone reviewed

events since announcing the standby loan package for Greece

last Sunday and took a first step toward something more

permanent to cope with difficulties the bloc might face in the

future.

‘We’ve reached an agreement that we need to set up a

permanent crisis (resolution) mechanism,’ Luxembourg Prime

Minister Jean-Claude Juncker told a news conference in Madrid,

where he chaired the talks.

The European Commission, the European Union executive,

plans to air proposals on the issue on May 12. The comment from

Juncker suggested the scramble to come up with a plan for

Greece under intense financial market pressure had prompted a

push to improve crisis-resolution more generally.

Athens, meanwhile, sought to clarify further details of how

an emergency loan package provided by its euro zone peers and

the International Monetary Fund would work, if necessary.

Greek Prime Minister George Papandreou told parliament that

any request to activate the 40-to-45 billion euro ($56

billion-$63 billion) financial aid mechanism would be made in

the country’s best interest if needed.

‘We are taking all the preparatory actions required,’ said

Papandreou, whose Socialist government has announced drastic

austerity measures in a bid to slash its deficit and allay

financial market fears about its ability to honor its debts.

The European Commission, European Central Bank and IMF will

send officials to Athens on Monday to discuss further aspects

of what would be the first such financial rescue of a euro zone

country in the 11 years since the launch of the common

currency.

‘It is a matter of preparing a joint program of

conditionality and financing if needed and if requested,’ said

European Economic and Monetary Affairs Commissioner Olli Rehn.

GREECE NOT YET ASKING

As it struggles to refinance a debt bigger than its

economic output, Greece moved closer to activating that

international aid when it said in a letter released to the

media on Thursday that it was seeking talks with the IMF and

European authorities.

Juncker said Athens had not requested activation of the aid

mechanism — under which euro zone capitals would lend Greece

up to 30 billion euros in the initial year and the IMF would

stump up additional money, perhaps 10 billion euros or more.

Financial markets, where Athens needs to roll over some 53

billion euros of sovereign debt this year with a big chunk

before May 19, remained edgy, with Greek 10-year bond yields rising to 7.3 percent on Friday.

The spread, or premium, investors demand to hold that debt

over what they require to buy safer German bonds surged to more

than 440 basis points at one stage, compared with 415 at

Thursday’s settlement, Tradeweb data showed. For full story,

see

The euro weakened 0.8 percent against the dollar.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ >

> Euro zone debt graphic: http://r.reuters.com/fyw72j

> Model of Greece’s economy and debt prepared to test scenarios

for growth, borrowing costs and fiscal austerity measures:

http://r.reuters.com/ved67j

> Graphic on bank shrs, bonds: http://r.reuters.com/baq86j

> Key Greek economic data: http://r.reuters.com/wax34j

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

An opinion poll released on Friday showed support for Prime

Minister Papandreou had risen even if his voters were unhappy

about austerity measures that include pay freezes and tax

increases to try to stabilize the country’s debt.

Two thirds of Greeks are dissatisfied with the government’s

performance but still overwhelmingly support it over the

conservative opposition, while support for Papandreou himself

rose to 68 percent, from 66 percent in March, the poll

conducted by Public Issue for Skai TV showed.

Essentially, Greece and its potential rescuers are trying

to ensure all is in place for if and when aid has to be rolled

out.

Greece next tests market readiness to finance it when it

tries to raise 1.5 billion euros via an auction of three-month

T-bills on April 20. In recent short-term funding operations,

it has had to pay far higher returns to investors than it did

before the crisis blew up.

LONGER TERM

On longer-term planning for the euro zone, little emerged

in Madrid on the shape a more permanent anti-crisis mechanism

might take or the political will to take the Greek crisis as a

cue for closer pan-European coordination in key areas.

German Finance Minister Wolfgang Schaeuble, who was not in

Madrid, said in a newspaper interview in March that he planned

to make proposals soon on a new European monetary fund to help

ensure the stability of the euro zone.

On a related matter, Commissioner Rehn said improvements to

policy coordination should include reviews at euro zone level

of draft budgets before they are approved in national

parliaments, which would give a better picture of fiscal

challenges in a timely fashion.

German Deputy Finance Minister Joerg Asmussen distanced

himself quickly from that idea.

‘It is quite clear that national budget authority has to

remain unrestricted, although we are obviously subject to the

rules of the (EU) Stability and Growth Pact,’ Asmussen told

reporters in Madrid.

Mario Draghi, head of Italy’s central bank and a member of

the ECB’s Governing Council, said consideration of changes to

EU rules and structures to avoid a repeat of the Greek crisis

was embryonic for now.

‘There is still a great lack of detail and we are still at

an extremely early stage. It’s still under discussion and no

one has a clear idea,’ he said.

($1=0.7153 euro)

((Additional reporting Nigel Davies, Paul Carrel, Gavin Jones,

Krista Hughes, Jan Strupczewski and James Mackenzie in Madrid,

and Renee Maltezou in Athens; Writing by Brian Love; Editing by

Dale Hudson, Gary Crosse))

Keywords: EUROZONE/

(brian.love@reuters.com; Ecofin newsroom; +34-91-344-3125); Reuters Messaging brian.love@reuters.com@reuters.net)

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