E.U. officials seeks to quell rumors of a pending bailout for Greece

By Anthony Faiola
Washington Post Foreign Service
Saturday, January 30, 2010

LONDON -- European officials on Friday sought to quell rumors of a pending bailout for Greece, insisting that the financially troubled nation could still manage to avoid a debt crisis on its own.

The effort to allay market speculation came as investor confidence in Greek bonds fell this week to levels not seen in a decade, amid concern over the government's ability to close its gaping budget deficit and maintain financial stability.

European officials appeared to open the door on Wednesday to the possibility of a bailout -- a sign some took as an indication that Greece's problems were reaching a critical stage. But E.U. economic commissioner JoaquĆ­n Almunia said Friday that the European Union was not considering emergency financial assistance. Officials from France, Germany and other nations in the region also renewed calls for Greece to cut spending and move quickly to restore investor confidence without European aid.

"British or German taxpayers cannot finance the failures of others," German Economy Minister Rainer Bruederle said at the World Economic Forum in Davos, Switzerland, according to the Associated Press. "Solidarity also means everybody adheres to common rules."

Greek officials also strongly denied reports that such plans were already in the works. "Any discussion of a Plan B is simply not in our vocabulary," Greek Finance Minister George Papaconstantinou said at Davos, where he reiterated Greek vows to bring runaway spending under control.

But European officials have found themselves in a tight bind that may necessitate a bailout despite their denials.

Worries about Greece are pummeling the euro and raising fears of a looming debt crisis that could spread to other financially struggling European nations, including Spain, Portugal and Ireland. Even Italian bonds have been hard hit by investors this week, given Rome's own problems battling a budget deficit. Underscoring the kind of pressure the Greek problem is creating across Europe, Spain on Friday announced a plan to slash its own bloated deficit by nearly $70 billion by 2013 in an effort to boost investor confidence.

The European Central Bank is not technically allowed to offer bailouts to member countries to plug budget deficits. That means restoring confidence in Greece may require direct bilateral loans from some of the larger countries that also use the euro, such as Germany and France. Another option is aid from the International Monetary Fund, though European governments may step in first to avoid the embarrassment of an international bailout for one of the 16 nations that use the euro.

"The issue is that no one knows right now what the Europeans are going to do about Greece," said Diego Iscaro, senior economist with IHS Global Insight in London.

Though most problematic for the nations that use the euro, a debt crisis in the region would have global implications, igniting a bout of turmoil in global bond markets that could drive up borrowing costs for many nations. Greece's woes have already been weighing on global stock exchanges from New York to Frankfurt. If the euro continues its sharp declines, analysts say, it could potentially hurt the competitiveness of U.S. exporters as the dollar sharply strengthens.

The problems center on Greece's budget deficit, which is a whopping 12.7 percent of the country's gross domestic product, and fears that the new socialist government may not be able to impose deep spending cuts without sparking social unrest.

Greek union leaders have already announced two days of strikes in February to protest salary freezes and benefit cuts.

On Monday, investors appeared to breathe a sigh of relief after Greece successfully held an auction for $11 billion in debt that drew far more bidders than expected.

But by Tuesday, concern resurfaced after reports that the Greeks were seeking to peddle a large amount of debt to the Chinese. The Chinese, however, were reportedly showing little interest.

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