European leaders try to calm fears of a Greek default

European leaders closed ranks on Tuesday to insist that Greece will not default on its bonds, trying to quell speculation that divisions within the euro area are becoming irreparable.

Speaking in Washington, Christine Lagarde, the International Monetary Fund’s managing director, said she was “very, very hopeful” that Greece can stick to the plan laid out under a bailout agreement with the IMF and other European countries. The IMF this month broke off talks with Greece over budget cuts and other measures required for the IMF to release the next installment of loans to the country.

Lagarde said an IMF team had returned to the country to resume work with Greek officials. Without loans from the IMF and other European countries, Greece would not be able to make payments on its bonds.

The prospect of a Greek default has loomed for a year and a half as the economy has been stuck in recession. A default by the Athens government could rock many European banks, which hold large amounts of Greek bonds, and unsettle global financial markets.

On Wednesday, Moody’s downgraded the credit ratings of French banks Societe Generale and Credit Agricole. The agency had put the two banks and rival BNP Paribas on a review for downgrade in mid-June.

With mounting fears of a default, German Chancellor Angela Merkel and French President Nicolas Sarkozy conferred by phone Tuesday. Both were reportedly preparing to hold a conference call with Greek Prime Minister George Papandreou on Wednesday to discuss a new round of Greek austerity measures and address fears that support is waning in Europe for the bailout.

Merkel, meanwhile, went on the offensive, seeking to quash rumors that Germany — the euro zone’s largest economy and the biggest contributor to the Greek rescue efforts — is prepared to cut off Greece’s financial lifelines. Those fears emerged after her economy minister and vice chancellor, Philipp Roesler, told a German newspaper last weekend that even worst-case scenarios for Greece, including an “orderly default,” should be considered. Such populist comments are seen to be playing to growing anti-bailout sentiments in Germany.

But Merkel issued a thinly veiled scolding to Roesler in a radio interview Tuesday as she struggled to keep her ruling coalition united on aiding Greece. She said Europe is doing everything possible to meet the “historic” challenge confronting the euro, warning of a “domino effect” in Europe if Greece were allowed to default. “That is why everyone should weigh their words very carefully,” she said. “What we do not need is alarm in the financial markets. There is already quite enough uncertainty.”

Faiola reported from London.

Anthony Faiola is The Post's Berlin bureau chief. Faiola joined the Post in 1994, since then reporting for the paper from six continents and serving as bureau chief in Tokyo, Buenos Aires, New York and London.
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