Last updated: July 15, 2015

The European Commission has submitted a formal proposal to use an EU-wide rescue fund to rush aid to Greece to ensure Athens does not default on €7bn it owes on Monday, a proposal that will require Britain to rally allies if it wants to block it.

According to an EU official, the commission submitted the plan to use the European Financial Stability Mechanism late on Tuesday after deciding that it was the best option to avoid Greece defaulting on a €3.5bn bond Athens owes the European Central Bank and €3.6bn it owes the International Monetary Fund.

If Athens were to default on the ECB bond, the eurozone central bank would be forced to pull emergency loans keeping the Greek banking sector afloat. “It’s the most European, politically and economically sound, readily available option,” said the EU official. “Without it, there is a risk the euro summit [agreement] won’t work.”

The commission’s decision comes despite angry objections to the plan by George Osborne, the UK chancellor, who at a meeting of EU finance ministers in Brussels on Tuesday called it “a non-starter”.

London is furious that the commission is risking inflaming British public opinion ahead of the UK’s referendum on EU membership, which will be held by 2017. But Mr Osborne also recognises Greece’s needs and wants to help find a solution.

Valdis Dombrovskis, the European Commission vice-president in charge of eurozone issues, told reporters on Wednesday that Brussels had narrowed the bridge financing options for Greece down to bilateral loans from eurozone capitals or the EFSM, but that it had become clear there was “no prospect for bilateral help”.

Instead, the EU will rely on the EFSM for the entire €7bn loan Greece needs to pay debts that fall due on Monday. Mr Dombrovskis said EU authorities were working on ways to guarantee non-euro members will not lose money if Athens defaults on the EFSM loan.

What funds would be used for an additional €5bn that comes due in August has not yet been decided, he added. The EFSM bridge loan would be for three months.

“This is not an easy option,” Mr Dombrovskis said. “We are aware of serious concerns by non-euro member states.”

One compromise EU officials are discussing involves indemnifying non-euro countries from any losses from the loans to Greece. As collateral, the eurozone could pledge the €3.6bn in profits from Greek bonds owned by the ECB.

Although no immediate objections to the idea emerged when the idea was raised at a meeting of senior EU officials earlier this week, it is not yet clear whether the move would be legally feasible and whether pledging collateral would be politically acceptable to eurozone countries. The idea was discussed on Wednesday morning in a conference call of EU finance ministry deputies.

Although there has been no formal agreement, British officials said they told counterparts they were willing “to be constructive” if a guarantee for the non-euro loans, which amount to about 28 per cent of the total, is found.

British officials see such a guarantee as respecting the principles of the political deal secured by Mr Cameron, even if it involves using the mothballed EFSM fund. “The agreement [between EU leaders] was that the UK and other euro-outs should be ringfenced from bailouts,” one said. “Something that delivers that principle delivers the agreement.”

If officials fail to reach a compromise, Mr Osborne will have to rally a number of EU members to block the proposal. Although he has the support of some other non-euro countries — both Denmark and Sweden registered their objections at Tuesday’s meeting — it is unlikely that Downing Street has enough allies at present to block the plan.

Even the formal attempt by Brussels to use this fund is a big political setback. Mr Cameron has trumpeted securing a “black and white” promise in 2011 that the fund would be mothballed so British taxpayers would not be part of eurozone bailouts.

The EU-wide EFSM was set up at the onset of the eurozone crisis with €60bn in lending capacity. When the eurozone moved to set up a new, permanent rescue fund for the currency union’s 19 members, Mr Cameron won agreement at an EU summit that the EFSM would never be used again for eurozone rescues.

But EU lawyers have argued that the 2012 deal was a political agreement, not a legal one, allowing them to try to tap the fund again.

A British government figure said on Wednesday that the UK remained firmly opposed and that the chancellor was “immovable” on the principle that British taxpayers’ money would not be used to bail out Greece. “We are not trying to be obstructive, but it is a eurozone issue.”

The commission’s approach potentially undercuts one of the legal avenues British officials are exploring to enshrine reforms to Britain’s EU membership terms. Given that formal treaty changes are unlikely before the referendum, Britain may need to rely on a decision by EU leaders — exactly the type of political promise that the commission is disregarding in the case of the EFSM.

One official involved in negotiating the EFSM decision in 2011 said the commission’s proposal demonstrated that joint declarations by EU leaders “are worthless” unless laws and treaties are changed.

The EFSM distributed €48.5bn as part of Ireland’s and Portugal’s rescue, meaning it has about €11.5bn remaining. Greece needs €7bn by Monday to make the ECB bond payment plus interest, and reimburse the International Monetary Fund for €2bn in arrears.