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EU officials wrangle over possible Greece rescue

(Agencies)
Updated: 2010-02-11 09:12

EU officials wrangle over possible Greece rescue

Protesters march during an anti-government rally in Athens February 10, 2010. A strike by Greek civil servants grounded flights and shut many state schools and offices on Wednesday, in the first big test of the government's resolve to tackle a debt crisis which has shaken the euro zone.The plackards read "I do not pay". [Agencies]

BRUSSELS: European Union governments are wrestling over how to help Greece, whose debt crisis has shaken the EU and undermined the shared euro currency.

Officials said Wednesday that the burden was on Greece to show markets details on how it can cut its massive debt, even as public sector workers strike to protest an austerity program.

Greek Prime Minister George Papandreou is pledging to "take any necessary measures" to reduce Greece's deficit.

But German officials said Wednesday there was no urgent need for a bailout at the moment and that "no decision on such help" is imminent. They also said EU rules prohibited them from guaranteeing another country's debts.

"Of course, we are running through worst-case scenarios," a German official said on condition of anonymity. "Greece has to present a credible volume of cuts. Agreement on that would be an important signal from tomorrow's summit."

Markets are looking for more - a plan on what EU nations would do if Greece were near a default.

Stephen Lewis, an analyst at Monument Securities, said financial markets "are taking it for granted that support will be forthcoming and would probably react negatively if the summit's outcome fell short of expectations."

The expectation of a backstop that would defuse Europe's debt crisis sent European stocks higher Wednesday. Markets have punished Greek bonds, meaning higher borrowing costs for the government, and the fear is that this negative view will spread to other financially troubled countries such as Portugal or Spain.

A default would also be a severe blow to the currency union, showing its failure to keep member nations within agreed limits on debt and deficit.

Finance ministers from the 16 nations that use the euro were holding emergency talks by video conference Wednesday starting at 1300GMT, the European Commission and the Spanish finance ministry said.

A senior German official who briefed reporters on condition of anonymity played down these talks, saying they would not take any major decision.

EU leaders are meeting Thursday with the European Central Bank's president Jean-Claude Trichet to talk through options. They will then issue a statement on the debt crisis.

"It will be like the weather, between today and tomorrow things can change," one EU official said. He could not be identified because of the sensitivity of the issue.

European governments were initially reluctant to help Greece out of a debt crisis it created itself — but now appear ready to help after market concerns intensified in recent days, dragging the euro down to an eight-month low against the US dollar and hitting stocks worldwide.

The head of France's national assembly, Bernard Accoyer, said Wednesday that European countries needed to show solidarity with Greece: "The reality is obvious to everyone. The issue is not to let Greece go bankrupt," he said.

Germany is also looking at ways to help Greece, but nothing has been decided yet, Michael Meister, deputy parliamentary leader of Chancellor Angela Merkel's party, was quoted as saying Tuesday. He said any aid would demand that Greece make radical spending cuts and reforms.

"The top priority for (the party) is a stable euro," Meister told the Financial Times Deutschland.

Until now, European officials have been reluctant to react to market concerns over Greece's ability to pay its debt or make savage spending cuts to shrink a record-high budget deficit in just three years.

But keeping silent and waiting for markets to calm is not working. Markets are betting heavily against the euro and only started to turn around this week as word filtered out that some kind of bailout plan was in the works.

Greece may not actually need financial help to plug its budget gap — but markets want to know that help is there if necessary. So far investor demand for Greek bonds has been high — but a deepening crisis would make it difficult for Athens to borrow all the euro 54 billion it wants this year.

Paul De Grauwe, an economics professor at Belgium's Leuven University, said eurozone countries have the financial means to bail out Greece "and should signal their intention to do so."

"The Greeks now are serious about change, and letting them down now doesn't seem to be the right thing to do," he said. "Yes, moral hazard is bad, but not preventing a crisis is even worse."

Greece is trying to reduce its massive debt with tough spending cuts. But these are unpopular, triggering protests and strikes Wednesday, a day after the government announced new tax increases on gasoline and a crack down on black market workers.

Civil servants walked off the job for 24 hours. Air traffic controllers, customs and tax officials, hospital doctors and schoolteachers stopped work to protest a freeze on salaries and new hires.

The strike grounded flights at Athens airport, left state hospitals working with emergency staff only and disrupted rail travel. However, turnout at two peaceful protest marches in Athens was low, at about 7,000, in a country where unions' demonstrations often draw tens of thousands.