EU official: Deal on Greece aid ready in few days

[April 30, 2010]  BRUSSELS (AP) -- European and German officials assured markets they were working quickly on approving a bailout for Greece as they try to keep the country's debt crisis from dragging others into a continent-wide financial meltdown.

European Union monetary affairs commissioner Olli Rehn said Thursday he was "confident the talks will be concluded in the next days."

He said negotiators from the EU, the European Central Bank and the International Monetary fund were "working day and night" to finish details of a bailout that would avoid a wider crisis and "safeguard the financial stability in Europe and globally."

Rehn's appearance at the European Commission's daily news briefing was scheduled at the last minute and appeared to be designed to reassure financial markets that the money will come through and a Greek government debt default was not on the cards.

Markets have been in turmoil over the last few days as the seemingly never-ending Greek crisis threatened to drag other countries like Portugal and Spain into the mire.

"Rehn's appearance means that we expect this deal to be wrapped on the weekend," said an EU official who asked not to be named.

German Chancellor Angela Merkel, who has pushed for strict conditions on help for Greece, said that "Germany will help as soon as the preconditions for that are there. We expect a result in a few days. After that, we in Germany will set our legislative process in motion."

Greece says it needs a bailout in order to pay euro8.5 billion in bonds due May 19 -- mounting fears that Germany might hold up its share of the overall euro45 billion bailout package agreed earlier this month was the catalyst to this week's market turmoil.

The consensus in the markets is that a much more extensive package will be offered to Greece than the original one-year euro45 billion deal agreed -- that has helped to shore up confidence in the markets and Europe's main stock indexes have advanced while the euro has clambered off its recent lows.

Many investors now think that a three-year euro120 billion deal may be in the offing.

The prospect of a deal eased massive pressure on Greece in the bond markets and saw shares on the Athens Stock Exchange rebound strongly after days of heavy losses. The market's General Index shot up by 7.71 percent to 1,839.06 points in afternoon trading, while the spread on Greek 10-year bonds dipped to 6.48 percentage points over their benchmark German equivalent, from a massive 10 percentage points Wednesday.

The FTSE 100 index of leading British shares was up 47.33 points, or 0.9 percent, at 5,633.94 while Germany's DAX rose 46.22 points, or 0.8 percent, to 6,130.56. The CAC-40 in France was 39.97 points, or 1.1 percent, higher at 3,826.97.

Markets appeared less jittery Thursday following two days of turmoil stoked by Standard & Poor's decision to downgrade its ratings on Portugal, Spain and Greece -- the latter's bonds are now junk status.

Merkel, IMF managing director Dominique Strauss-Kahn and European Central Bank president Jean-Claude Trichet met Wednesday in Berlin and indicated help was on the way.

Economists have been critical of EU delays. Citigroup economist Juergen Michels in London said speed is of the essence. "The first obvious step is to get the Greek aid package through very quickly," Michels said.

Afterward, European leaders should "find provisions to support the banking sector," which is exposed to the risk of a Greek sovereign debt default, Michels said.

According to figures from the Bank for International Settlements, the Basel, Switzerland-based organization that serves as a bank for central banks, France and Germany are the two countries holding the most Greek government debt, with $75.2 billion held in France and $45 billion held in Germany.

French economist Marc Touati said possible solutions to the crisis could include an eventual Greek exit from the euro, or boosting Europe-wide growth by cutting interest rates to promote a further depreciation of the euro. A weaker currency makes European goods cheaper for foreign purchasers and helps exporters.

Touati blames the ECB for "sacrificing growth on the altar of inflation" and said that if the bank had cut rates by 0.5 percentage points last year "we wouldn't be in this situation."

In a speech Thursday, ECB President Jean-Claude Trichet acknowledged that Europe lacked "a sense of direction."

While claiming that the continent's leaders have responded to the crisis "with speed, energy and determination," Trichet said, "What we need most at this time is a strong sense of direction. We need a sense of direction that can guide us on how we can emerge from these turbulent events and how we can return to the path of economic stability."

In Berlin, two major German opposition parties said they will not block an aid deal for Greece, helping ensure the funding can be passed through parliament in time for Athens to meet its debt payments.

The current discussions are also likely to lead to more fundamental changes within the eurozone, which has appeared ill-equipped to deal swiftly with a budget crisis within its borders.

Schaeuble has called for the introduction of a mechanism to allow states to undergo an orderly bankruptcy -- similar to the one created for banks after the financial crisis.

"We need something similar for states who are part of a monetary union," the DAPD news agency quoted him as saying. "We have to learn from the crisis."

But Axel Weber, president of Germany's Bundesbank central bank, warned of dire consequences if Greece were permitted to fail. "The effect on financial markets and other states would be unpredictable under the current circumstances," he was quoted as saying in the Bild newspaper.

Marco Annunziata, chief economist at UniCredit Group, said letting the euro120 billion figure slip meant markets would react poorly to news of anything less.

"This is awful expectation management," Annunziata said. The comments "will further fuel market hopes for a more substantial package than the euro45 billion reed so far and thereby increase the risk of disappointment.

"The hesitant and haphazard reaction of Eurozone policymakers to Greece's predicament underscores the dangers of contagion," he said. "The eurozone has taken over six months to react and is allowing uncertainty to persist nearly to the eve of the May redemptions. This does not bode well for their ability to react quickly should a second flashpoint burst.

[Associated Press; By ROBERT WIELAARD and GREG KELLER]

Associated Press writer Juergen Baetz contributed from Berlin.

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