Greece edges towards the safety of a rescue

Divisions deepen between Paris and Berlin over how to tackle eurozone crises
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European Union leaders are setting a "framework" to help Greece overcome its debt crisis, which has destabilised the eurozone for months and threatened the very future of the single currency.

However, during what observers described as a "tense" day of talks at the European finance ministers' summit in Brussels, no immediate bailout for Greece is in prospect. French and German finance ministers continue to hope that Greece's own efforts to establish control of its public finances, coupled with strong verbal political support from other EU states, will make such a rescue package unnecessary.

Meanwhile, reports continue to suggest more fundamental long-term differences between Paris and Berlin on the economic management of the eurozone. The euro slid again against the dollar yesterday, while Greek government bonds strengthened on hopes that eurozone governments would not let the weakest link in the European monetary system default, for fear of systemic risk and a series of attacks on the other so-called PIIGS – Portugal, Italy, Ireland and Spain.

The Greeks will present a report on their progress on reducing the deficit to the full meeting of all 27 European finance ministers today.

Greece has now formally implemented its third austerity budget in as many months, in the teeth of fierce resistance from the unions. On Friday, Athens said it had exceeded its deficit-cutting targets in January and February, and the worst of the pressure on Greek sovereign debt – as measured by CDS spreads – appears to have passed.

The German Finance Minister, Wolfgang Schauble, and his French counterpart, Christine Lagarde, ruled out any aid package being announced immediately, though it is an open secret that both sides have been making contingency plans for many weeks. Given the EU Stability and Growth Pact's formal ban on international bailouts, and political resistance in Germany to eurozone subsidies, the most likely method for providing Greece with the funds to avoid default on its national debt would be via a series of bilateral agreements, closely linked and conditional on the austerity plans that Greece has announced, and possibly new ones.

Greece's budget deficit this year will approach 13 per cent of GDP; it is due to be below 3 per cent by 2012, a tough target by recent standards. If it were to request assistance – and the formal position remains that it has not – Greece would need around €25bn over the next few months.

The Greek government raised VAT from 19 per cent to 21 per cent yesterday, and added more duty to fuel.

Greece's finance ministry says the austerity programme, which also involves civil service wage cuts and freezes on hirings and pensions, "appears sufficient" to meet budget saving targets.

Yet although there appears to be increasing harmony between Berlin and Paris on the immediate issue of Greece, there are deepening divisions on issues such as "European economic government", a new European Monetary Fund and persuading nations, principally Germany, that run trade surpluses and smaller budget deficits to share some of the burden of adjustment with the weaker states.

Meanwhile the hedge funds and private equity businesses of London – representing the bulk of such activity in the EU – are waiting with some trepidation the deliberations of the finance ministers on the latest hedge funds directive. Some managers have threatened to quit the EU for Switzerland.

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