EU LEADERS are preparing to pledge highly conditional financial support for Greece to prevent the country defaulting on its debt.
In an effort to contain speculation against Greece and other debt-dependent euro zone members, EU leaders are likely to state explicitly for the first time that they would provide emergency aid to the country as a last resort.
The initiative, which comes amid rising fear that the Greek crisis would have a contagion effect on Spain, follows moves by German chancellor Angela Merkel to authorise discussions on last-ditch measures to help Greece.
Germany admitted yesterday it was “playing through” various scenarios to help Greece, but dismissed reports that Berlin is considering a direct bilateral bailout. However, speculation of a Greek rescue plan sent markets soaring.
German government officials said Berlin was anxious to prevent “an upheaval bigger than Hypo Real Estate”, the bank Germany rescued from failure after multibillion euro speculation by a Dublin-based subsidiary.
A statement of support from EU leaders is expected following a special economic summit today in Brussels, which was convened by European Council president Herman Van Rompuy to discuss a new medium-term economic plan for the EU.
As thousands of Greek public sector workers and pensioners took to the streets yesterday in protest against sweeping austerity measures, EU finance ministers discussed exceptional measures to support the beleaguered government in an emergency video-conference.
“There’s agreement that the minimum that has to be done is a very carefully worded but public line that [EU leaders] all have to adhere to,” said a diplomatic source.
“All we know is that Herman Van Rompuy will have to say something to journalists and that there will have to be something in writing.”
Although the modality of any intervention remains shrouded in doubt, sources briefed on the discussions said any rescue package for the country would only be possible if accompanied by stringent policy conditions imposed from Brussels.
“Bailouts don’t come for free. The Greeks are unhappy about this because it’s very undignified for them,” sources said.
Under discussion at present is an initiative led by Germany – and supported by France and other big EU members – to offer loan guarantees to Greece. Bilateral loans from Germany and France are a further possibility.
Any effort backed by national governments would of its nature require EU support and co-ordination, even if there was no call on EU funds, well-versed officials said.
However, the creation of a standby credit line from the 16-member euro zone group along the lines of International Monetary Fund (IMF) facilities is also in the frame.
While European law prohibits any emergency loans from the European Central Bank or national central banks, a wider EU credit line remains a possibility.
However, diplomatic sources stressed that EU leaders do not want to have to reopen the European treaties to find a mechanism to assist the country.
Greece has been under pressure on the financial markets for months after its newly elected Socialist government declared last autumn that its budget deficit would be twice the previous estimate, raising fears of a default.
Despite messages of support from the European authorities for a swingeing series of budget cutbacks and tax increases, prime minister George Papandreou has struggled to convince markets that his government can weather the crisis on its own.
“The stability programme will be implemented in every measure,” Mr Papandreou said in Paris yesterday, where he held talks with President Nicolas Sarkozy.
The official German line is that it expects the Greek government to present an “ambitious” austerity programme today, obviating the need for external assistance.