Confrontation in EU likely over fresh rescue package for Greece

A confrontation between European governments over a second rescue package for Greece, loomed large even as a downbeat fiscal outlook in Portugal opened a new front in the debt crisis.

Bargaining with Greece over a debt writedown and its economic management came as EU leaders agreed on key planks of the strategy to put an end to the financial crisis. They agreed on setting up a full-time €500 billion rescue fund and approved a German-inspired deficit-control treaty.

The leaders broke up after a Brussels summit late yesterday failed to reach an accord over how to contain Greece's widening budget hole and as German chancellor Angela Merkel voiced exasperation over the Athens government's failure to take forward an economic makeover.

''Greece's debt sustainability is especially bad,'' Merkel told reporters. ''You have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap.''

It was the 16th summit in the two years after the Greek debt emergency led to a Europe-wide drama with unprecedented aid packages for Greece, Ireland and Portugal pouring in and shattering European faith that the common currency was indestructible.

Later, EU president Herman Van Rompuy met with a smaller group, including Greek prime minister Lucas Papademos and European Central Bank Executive Board member Joerg Asmussen to consider the options on Greece.