European governments agree to help Greece-source

9. February. 2010
Reuters

European governments have agreed in principle to support struggling euro-zone member Greece and are considering various options, including bilateral aid, a senior German coalition source said on Tuesday.

"The decision on help for Greece has been taken in principle within the euro zone," the source said.

The comments were the first clear sign that European economic heavyweight Germany may be ready to step in to stave off a crisis of confidence in the 16-nation currency bloc that has roiled markets around the globe.

Earlier, EU Economic and Monetary Affairs Commissioner Joaquin Almunia had fuelled speculation of a rescue by urging European leaders to help Athens, which is under acute pressure to rein in its swollen debt and deficit.

"I would like the leaders of Europe to say to the Greek authorities that in exchange for the efforts you are making, you are going to get support from us," Almunia told the European Parliament.

"You don't get support for free. That would simply lay the foundations for further imbalances and crisis. We have got instruments to provide that in exchange for clear commitments that they will meet their responsibilities," Almunia said.

The euro, which fell to near 9-month lows against the dollar on Friday amid worries about Greek, Portuguese and Spanish finances, hit session highs near $1.38 following the comments from the German source.

The spreads of Greek bond yields over benchmark German issues also narrowed sharply on the day.

Fiscally fragile euro-zone countries like Greece, Portugal and Spain are under intense pressure to rein in stretched budgets, aggravated by a steep economic downturn and billions of euros in stimulus spending.

Their financial woes have hit investor confidence in the 11-year old single currency bloc and even sparked speculation that a country could be forced out of the currency area.

The Greek troubles are expected to dominate a summit of EU leaders on Thursday that was originally intended to focus on a long-term growth strategy for the bloc.

ECB CHIEF RETURNS EARLY

Speculation about a Greek rescue began early in the day by news that European Central Bank President Jean-Claude Trichet was cutting short a trip to Australia to attend the special EU meeting in Brussels.

Although an ECB spokesman played down the significance of the change in travel plans, it fuelled speculation that EU action to help Greece resolve its debt woes may be forthcoming.

Meanwhile, EU policymakers continued to put pressure on Athens to deliver on its deficit-cutting plan.

The government has vowed to cut the budget deficit, which spiralled to 12.7 percent of gross domestic product (GDP) last year, below the EU's 3 percent ceiling by 2012.

On Tuesday, Finance Minister George Papaconstantinou outlined plans to freeze public sector wages and overhaul the country's tax regime in a bid to consolidate the budget.

French Economy Minister Christine Lagarde said she was confident Greece would deliver on its fiscal programme, adding that EU partners were watching the situation carefully.

ECB Governing Council member Ewald Nowotny said the central bank could not help Greece due to its no-bailout clause and any help from countries would be a political decision.

Fellow Governing Council member Erkki Liikanen told Finnish broadcaster YLE: "We wait and trust that Greece will carry out those actions it announced last week."

Greek unions have threatened to intensify strikes in protest at the Greek government's wage and tax changes.

The threat of social unrest in Greece, Spain and Portugal has fuelled concern that governments may struggle to push through their austerity plans.