Germany is ready to supply more than €8bn (£7bn) for a joint eurozone-IMF rescue package for Greece "in a few days", though talks on a deal may drag into May.
As the risk premia demanded by investors to hold Greek government debt soared to levels usually associated with a banana republic rather than a eurozone member, the German Chancellor, Angela Merkel, said that she would not release funds until Athens demonstrates that it has got a "sustainable" plan to cut its budget deficit, with "tough" measures over a period of years. She promised a decision in a "few days". Germany will fund around €8.4bn of the total €45bn package.
Chancellor Merkel added: "Germany will help if the appropriate conditions are met. Germany feels an enormous obligation towards the stability of the euro. If Greece is ready accept tough measures, not just in one year but over several years, then we have a good chance to secure the stability of the euro for us all."
Funds will need to be in place before the next instalment of Greek debt matures – €8.5bn on 19 May. The Greek Finance Minister, George Papaconstantinou, is negotiating terms in Washington. Chancellor Merkel said that, having spoken to the IMF's managing director, Dominique Strauss-Kahn, the Greek-IMF negotiations could run into early May.
The rescue is deeply unpopular among Germans, who have seen many of the Maastricht Treaty safeguards around the single currency abandoned in the financial crisis.
For now, at least, holders of Greek debt will not have to suffer a restructuring – in effect an orderly default. Even so, the risk premia demanded by investors for holding Greek government paper over the safe German equivalent has hit more than 600 basis points, comparable with Argentine levels of credit risk.
The French Finance Minister, Christine Lagarde, said restructuring Greek debt was "off the table". Many in German official circles, especially the Bundesbank, have made little secret of their distaste for the rescue, which mainly consists of a series of bilateral loans to Greece; for them, a default would be preferable, as would a purely IMF solution. But Germany's leadership has given in to intense pressure from Paris to minimise the role of the Washington-based IMF, viewed by France's President Nicolas Sarkozy as a humiliating extension of American interference.
Chancellor Merkel's stern language is an attempt to answer trenchant criticism on the legality and the wisdom of the rescue. The opposition Social Democrats have said that they will not make concessions in parliament to facilitate the deal. Members of the Bundestag have publicly questioned why hard-pressed Germans should pay for Greeks to retire in their fifties. Elections in the state of North Rhine-Westphalia on 9 May will be a key test of support: they are expected to result in a spectacular rebuff.
The mirror image of German public disapproval in Greece – strikes and protests – also threaten the rescue plan. Posters with the slogan "Out With The IMF" have appeared all over Greece and this week transport workers and civil servants will take industrial action.
Last Friday, Greece formally applied for the long-awaited rescue package, to be supervised by the European Central Bank and the IMF. The €45bn on offer should see Greece through the next year or so.
However, most economists believe that longer-term assistance will be needed, as Greece's public finances are unlikely to be mended quickly. Barclays Capital has suggested that a package of €90bn will be needed over the next few years, though even this may not prevent the "contagion" spreading to Portugal, Spain or Ireland, presaging a possibly fatal crisis for the single currency itself.
Piero Ghezzi, of Barclays Capital, said: "The contagion risk of a debt restructuring at this point could be significant; it is irrational for the EU and the IMF to push Greece into any restructuring early on as part of its bailout package – even if a restructuring cannot be excluded at a later point.
"The Greek debt problem remains a marathon not a sprint."