Euro zone countries today held intensive talks on a possible financial rescue for debt-ridden Greece. The talks came as Greek civil servants staged the first major strike against the government's cost-cutting plans.
Financial markets gave Greece a breather on growing expectations that EU countries will find a way to help the country avoid a possible default in return for sweeping budgetary reforms to slash its deficit.
The European Commission said euro zone finance ministers held a video conference today to discuss the issue. Sources in Germany's ruling coalition said Berlin was in intensive international and domestic talks about possible aid to Greece on the eve of an EU leaders' summit in Brussels.
Tomorrow's summit is set to be dominated by the debt crisis that has shaken confidence in the euro.
German sources were quoted as saying that agreement on who would help Greece and by how much could be made on the sidelines of the EU summit but the German government had made no decision yet on concrete aid measures.
The premium investors charge to buy Greek government debt rather than benchmark German bonds tumbled to its lowest level in three weeks and Greek bank shares rose on news that euro zone countries were working on financial support.
Market pressure on the bonds of Portugal, Spain and Ireland also abated after the strongest signal so far that Germany, Europe's biggest economy, may be willing to help Greece.
Greek Prime Minister George Papandreou said today that the government was ready to take 'any necessary measure' to reduce its deficit by four percentage points this year. He was speaking after a meeting with French President Nicolas Sarkozy.
The Greek government has vowed to cut the budget deficit below the EU's 3% ceiling by 2012 after it spiralled to 12.7% of gross domestic product (GDP) last year.
In Athens, striking civil servants grounded flights and shut many schools and offices in a foretaste of the resistance the Socialist government faces to a wage freeze, pay cuts for higher public sector earners, tax rises and a later retirement age.
Greek bail-out will come with strings attached
Any financial assistance for Greece is likely to be tied to strict conditions, but the nature and scale of a rescue remain unclear, partly because a treaty prohibition on EU bail-outs for euro zone members complicates the task.
The Wall Street Journal said Berlin was considering taking a lead role with other EU partners in offering Greece and other highly indebted euro zone countries loan guarantees in an effort to calm market fears of a default. The newspaper said German Finance Minister Wolfgang Schaeuble had discussed the idea in recent days with Trichet.
Brussels think-tanks have said a package of bilateral loans to Greece by the main euro zone states tied to budgetary benchmarks to be monitored by the European Commission would be the most straightforward solution.
