Euro zone holds intensive talks about Greek rescue | Reuters

Euro zone holds intensive talks about Greek rescue | Reuters:

"BERLIN/ATHENS (Reuters) - Euro zone countries were holding intensive talks on Wednesday about a possible financial rescue for debt-stricken Greece as civil servants staged the first major strike against Athens' crisis-driven austerity plan."

Financial markets gave Greece a breather on growing expectations that European Union countries will find a way to help the euro zone laggard avoid a possible default in return for sweeping fiscal reforms to slash its deficit.

The European Commission said finance ministers of the 16 countries that share the single European currency would hold a video conference on Wednesday to discuss the issue, a European Commission spokesman said.

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 set to be dominated by the debt crisis that has shaken confidence in the euro.

They said 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 more than 5 percent on news that euro zone countries were working on financial support.

Market pressure on the bonds of highly-indebted Portugal, Spain and Ireland also abated after the strongest signal so far that Germany, Europe's biggest economy, may be willing to help Greece. But talk of a possible rescue hit safe haven German debt.

Portugal's debt management agency received strong demand for a 10-year bond issue which analysts expected to be priced at a 140 basis points premium to German Bunds. The IGCP agency said it had received applications for 8 billion euros ($10.97 billion) when it would normally place 3 billion euros of bonds.

A senior source in Berlin's ruling coalition told Reuters on Tuesday that euro zone governments had agreed in principle to aid Athens, although the method had still to be worked out.

It would be the first such rescue in the single currency's 11-year lifetime.

PAPANDREOU SEEKS SUPPORT

Greek Prime Minister George Papandreou held talks in Paris to seek support from the second biggest euro zone economy for his drive to slash a huge budget deficit, although a French source said there was no agreement yet on aid for Greece.

The Greek government has vowed to cut the budget deficit below the EU's 3.0 percent ceiling by 2012 after it spiralled to 12.7 percent 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.

Investors, rating agencies and EU policymakers were closely watching the 24-hour strike and the government's response.

They have said Greece, which is prone to violent street protests, will not get support for free and urged the government to be firm.

Private and public sector unions plan another show of strength with a general strike on February 24.

EU leaders meeting in Brussels on Thursday with European Central Bank president Jean-Claude Trichet may well issue a statement on Greece's financial crisis, an EU source said.

Any financial assistance would likely 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.

Germany and France would probably bear the lion's share of any aid, since Italy and Spain, the other two big economies in the euro zone, are themselves under financial pressure.

Britain, which opted out of the euro, has made clear that Greece is the euro zone's responsibility.

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 fiscal benchmarks to be monitored by the European Commission would be the most straightforward solution.

Economists at the Bruegel economic think-tank estimated Greece's needs in a range of 12-24 billion euros.

German leaders had previously rejected any talk of a bail-out, saying Athens must do its own homework and warning of a precedent that would create moral hazard, rewarding fiscally profligate countries.

EU officials have been particularly unsympathetic to Greece since it admitted in October that its statistics were fraudulent and the 2009 budget deficit would be 12.7 percent of gross domestic product, more than twice the announced level.

(Additional reporting by Madeline Chambers in Berlin, Marcin Grajewski and Jan Strupczewski in Brussels, Anna Willard and Emmanuel Jarry in Paris and Emilia Sithole in London; writing by Paul Taylor, editing by Mike Peacock)