Markets cautious about EU aid pledge to Greece

[March 16, 2010]  BRUSSELS (AP) -- European countries' pledge to help Greece with loans received a lukewarm welcome from markets on Tuesday as investors remained worried that the form and timing of the aid remains unclear.

Stock markets rose but the euro traded in a narrow range around $1.3675 after EU finance ministers said they had a blueprint for financial help for Greece -- which they hope the debt laden country will never need.

The exact form of the help -- likely some form of bilateral loan -- was yet to be decided. Jean-Claude Juncker, the head of the eurozone group, said European Union leaders meeting later this month would make the final decision on the size and the type of financial rescue.

"There is no loan facility at the moment, because Greece hasn't asked for anything but if this is the case, I'm sure all the euro countries will be there," said Spanish Finance Minister Elena Salgado, as she arrived for the meeting.

Greece needs to borrow euro54 billion ($74 billion) this year -- euro20 billion of that in April and May -- but is being forced to pay higher interest rates than more fiscally prudent European nations.

Greece has warned that its budget problems will worsen unless interest rates come down -- and the eurozone pledge of help is one way of trying to convince markets that they should charge less for Greek debt.

Tuesday's market reaction showed investors remain cautious as long as the details are not ironed out.

Ben May, European economist at Capital Economics, noted it was still uncertain how any bilateral loans would work and what would trigger the aid. Still, the fact that help would not be limited to guarantees was a positive sign.

"While explicit support could still be some way off, the latest announcement is a step forward," he said.

A Greek default would be a disaster for the euro, and economists and financial markets assume the EU would find some way to step in and stop it.

In a bid to soothe investors, Greece has announced some hefty measures to squeeze its budget and save another euro4.8 billion this year including public sector wage cuts that angered unions and sparked two nationwide strikes last week.

"The steps that have been taken by the Greek government are obviously in the right direction," said Swedish Finance Minister Anders Borg on Tuesday.

"They need support now from the public and the EU."

In a statement Monday, eurozone nations said financial help would not come cheap.

"The objective would not be to provide financing at average euro area interest rates, but to safeguard financial stability in the euro area as a whole," they said. "The proposals ... would provide strong incentives to return to markets as soon as possible."

Juncker said the potential financial rescue would not violate an EU treaty that prevents one country taking on the debt of another member or any other national laws. He said they were not considering bilateral loan guarantees -- which would leave loans from individual eurozone nations to Greece as the most likely option.

[Associated Press; By EMMA VANDORE]

AP Business Writer Aoife White contributed to this report.

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