EU government bank says no bailout for Greece

[February 09, 2010]  BRUSSELS (AP) -- The European Union's government-backed lender said Tuesday that it cannot bail out Greece or any other European country that can't pay its debts.

The European Investment Bank said in a statement that it could "only finance economically viable projects" and that its rules would not allow it help an EU nation cover a budget deficit.

Europe's currency union faces an unprecedented crisis as markets and the euro currency have tumbled in recent weeks -- with the euro trading at an eight-month low against the U.S. dollar -- on worries that Greece might need financial rescue to cope with its soaring debt and deficit.

These fears have hiked the cost of Greek borrowings and upped the pressure on other countries in the 16-nation eurozone that are running massive deficits, such as Portugal, Spain and Ireland.

Jittery markets are piling the pressure on EU nations to state clearly what they would do if a euro member is likely to default.

Officials have not managed to calm these market worries with repeated assurances from both the EU and the Greek government that Greece can pull itself out of its debt crisis with a harsh austerity program of cuts to public spending that have already triggered strikes and protests.

Greek Prime Minister George Papandreou held government talks Tuesday on accelerating those cuts with reforms to pensions and wages -- an effort to prove to markets that Greece can and will make long-term spending reductions and won't need a bailout.

The EU's executive commission has backed the Greek program and says no bailout will be needed. European Union nations say the same, rejecting reports that they are talking about possible bailout plans.

European Central Bank member Juergen Stark even said last month that "markets are deluding themselves if they think that member states will open their wallets to save Greece."

But they may have to if the crisis proves contagious and markets see defaults as likely for other eurozone nations.

EU leaders meet Thursday to talk about ways to speed up economic growth -- but Greece is not officially on the agenda.

The bailout options are limited -- but not impossible.

European Union agencies -- such as the European Commission -- can't take on debt for governments. Neither can the EIB, it said. It has euro75 billion ($103 billion) to lend for infrastructure and economy projects, usually in poorer EU nations.

Three EU members that don't use the euro -- Hungary, Latvia and Romania -- have secured bailouts from the International Monetary Fund and the EU. But EU officials say that IMF help won't be needed for a euro country.

That leaves the ball in the court of EU governments. Legally, governments can do it if a member state "is seriously threatened with severe difficulties caused by ... exceptional occurrences beyond its control."

What remains is deciding how to do it -- and what taking on Greek debt could do to richer nations.

EU governments could cut the costs of Greek spreads overnight by agreeing to jointly underwrite Greece's debt -- but this could hike the cost of their own borrowings.

They could also provide a loan to Greece -- but it is uncertain that they could or would provide enough to give Greece some long-term relief. Greece is looking to borrow some euro51 billion from bond markets to pledge its budget gap this year.

Another option would be bonds, issued jointly by European governments to raise money from markets. EU and ECB officials have talked this down but European socialists are keen -- including Greece's current government -- because it could ease harsh spending cuts.

What is clear is that EU governments do not want to let Greece off the hook -- and that any option would force Greece to make long-delayed reforms to rife tax evasion, rigid labor market rules and an inefficient and high-spending pension and health care system.

[Associated Press; By AOIFE WHITE]

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