Wednesday, Feb. 10, 2010

Greek woes spread to EU

Countries want to help but are mum on how

BRUSSELS -- Wealthy European nations were moving closer toward swallowing a bitter pill Tuesday: rescuing Greece from its own overspending to stop its debt crisis from dragging down the euro and stock markets all the way to Wall Street.

Stocks in the U.S. and Europe rose on expectations of some kind of decisive action to stem fears of a Greek debt default from spreading to other countries, undermining Europe's hesitant economic recovery.

European Union leaders will issue a statement on Greece's debt crisis during a Thursday meeting, officials said Tuesday - without giving details of what it would say - as the European Central Bank's President Jean-Claude Trichet joins them for talks in Brussels.

The crisis has exposed the EU's Achilles' heel - states remain independent to spend as they wish, though 16 governments can end up sharing the consequences. Countries that help Greece risk having their own borrowing costs rise as a result, and could see other struggling eurozone economies get in line for aid.

Bernard Valero, a spokesman for France's foreign minister, said Tuesday that "we must help" Greece. "It's about helping a friend ... we are the European family." He did not give any details of that help.

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.

"The top priority for [the party] is a stable euro," Meister told the Financial Times Deutschland. He added that any aid would come with the demand that the Greek government make radical spending cuts and economic reforms to get its house in order - some of which Athens is already planning.

A bailout for Greece could prove unpopular with German voters who are fond of economic prudence. German Finance Ministry spokesman Michael Offer downplayed the Financial Times Deutschland report, saying no bailout had been decided and "anything else is speculation."

Markets reacted well to news that Trichet would make a rare appearance at an EU summit - which they saw as confirmation that some kind of help would be discussed.

European stocks inched up Tuesday, and the euro rose by three-quarters of a cent to $1.3725, down from $1.51 in December. The Greek stock market rose by 4.5 percent.

The EU's statement will have to go beyond the bland words of confidence in Greece to stop the euro's slide. The euro is trading near an eight-month low against the U.S. dollar, and markets are increasingly pessimistic.

"Thursday's EU summit is the real litmus test," said VTB Capital analyst Neil MacKinnon. "If it fails to come up with any debt restructuring package or a quasi-bailout, then the pressure on the euro will increase."

MacKinnon said traders' bets against the euro have now reached a record. Some of those short trades, reported by the U.S. Commodity Futures Trading Commission, have likely been exited as the euro rose Tuesday, but the data suggests market sentiment is at a turning point.

HSBC analysts were skeptical that the Thursday talks could stop the slide in euro pessimism, saying "we'd be greatly surprised if those meetings concluded in a manner which diminished market concerns about the matter."

An unprecedented bailout for a euro member would be a blow to the monetary union by showing that the framework set up to support it is insufficient to ward off a crisis. Greece's budget deficit stood at 12.7 percent of its gross domestic product in 2009, more than four times the EU's 3 percent limit. The country's public debt has exceeded 113 percent of GDP.

Other countries also have run afoul of the limits, despite EU warnings and scoldings.

Continued market skepticism about government finances means Greece and other troubled countries - such as Portugal, Spain and Ireland - are already paying higher interest rates. That could force them to intensify austerity measures - less spending and more taxes - that could cut wages, particularly in the public sector, and reduce or eliminate any economy stimulus for flagging growth.

Greece on Tuesday tried to appease EU partners and markets by unveiling sweeping proposals to increase retirement ages, hike taxes on the powerful and wealthy Orthodox Church and force street vendors to issue receipts.