Government officials in Greece and Germany have denied a report that officials in Germany's finance ministry are working on contingency plans to handle the fall-out if Greece defaults or needs to restructure its debt.
The report in the Die Zeit weekly magazine in Germany quoted a source close to the finance ministry as saying that German civil servants were analysing what a Greek restructuring would mean for German banks as well as the stability of the euro zone.
'They have started to consider the unthinkable,' said the source. 'It is not something they want but something they recognise.'
Die Zeit weekly, citing unnamed German government sources, said in a preview of Thursday's edition that Berlin was considering a plan which would allow Greece to buy back its own debt using a euro zone crisis fund.
But a German finance ministry spokesman said in a statement: 'Germany is not preparing a restructuring of Greek debt.' The report in Die Zeit used the word 'Umschuldung' which could refer to either a restructuring or a rescheduling. Publicly, Germany remains opposed to any restructuring or partial non-payment of Greek debt.
The EU's 27 countries are working on the structure of a permanent mechanism to cope with future debt problems, including measures for an orderly default. They also want to strengthen the existing financial safety net for weak countries by the end of March.
T-bill auction comforts debt-laden Portugal
Prime Minister Jose Socrates' fight to avoid a bailout for Portugal was bolstered today by a successful treasury bill auction in which the country's borrowing costs fell.
Demand was strong for the €750m of T-bills on offer and the 12-month yield - the rate which the borrower pays - fell to 4.029% down from 5.281% in a similar auction last month.
The positive development followed an encouraging bond auction last week and buys Socrates some time as he tries to impose austerity measures and avoid the fate of Greece and Ireland, which were both forced to accept rescues last year from the European Union and International Monetary Fund.
The premium investors demand to hold Portuguese 10-year bonds rather than German benchmarks fell to around 380 basis points today, the lowest level in over two weeks.
An opinion poll showed today that President Anibal Cavaco Silva looked certain to win re-election in a presidential vote on Sunday, a result which would shore up political stability for the time being.
The survey gave Cavaco Silva, of the centre-right Social Democratic Party, 61.5% of the vote. His closest competitor, Manuel Alegre of the ruling Socialists, garnered 15%.
Although the role is largely ceremonial, the president does have the power to dismiss the prime minister and call an election if there are sufficient grounds.
Cavaco Silva backs Socrates' austerity drive and goal of avoiding a bailout. He has said that should Portugal have to accept an international rescue package, then it would amount to a failure of government.
Many investors and analysts believe that Portugal is already doomed and a bail-out is inevitable, the only question being when. The economies of Portugal, Greece and Ireland together make up only 5% of the European Union.
The greater fear in financial markets is that the contagion will spread to much bigger Spain, whose banks are heavily exposed to Portugal. A bail-out for Spain could empty the EU's emergency coffers.
Socrates still insists no help is necessary. His government aims to cut the budget deficit this year to 4.6% of gross domestic product from 7.3% in 2010 through civil servant salary cuts and tax hikes.
However, Portugal is traditionally plagued by low growth and some officials have expressed concern it could slip back into recession this year after an expansion in GDP of 1.3% in 2010.
