European and German officials assured markets they were working quickly on approving a bailout for Greece as they try to keep the country's debt crisis from dragging others into a continent-wide financial meltdown.
European Union monetary affairs commissioner Olli Rehn said today he was "confident the talks will be concluded in the next days."
He said negotiators from the EU, the European Central Bank and the International Monetary fund were "working day and night" and were nearing an agreement on "a multiannual program" that will include major changes in Greece.
Rehn said the financial lifeline was being put together to avoid a wider crisis and was "for every euro area member state and their citizens, to safeguard the financial stability in Europe and globally."
Rehn's appearance at the European Commission's daily news briefing was scheduled at the last minute and appeared to be designed to reassure financial markets that the money will come through and a Greek government debt default was not on the cards — the markets have been in turmoil over the last few days as the seemingly never-ending Greek crisis threatened to drag other countries like Portugal and Spain into the mire.
"Rehn's appearance means that we expect this deal to be wrapped on the weekend," said an EU official who asked not to be named.
German Chancellor Angela Merkel, who has pushed for strict conditions on help for Greece, said that "Germany will help as soon as the preconditions for that are there. We expect a result in a few days. After that, we in Germany will set our leiglative process in motion."
Greece says it needs a bailout in order to pay €8.5 billion in bonds due May 19 — mounting fears that Germany might hold up its share of the overall €45 billion bailout package agreed earlier this month was the catalyst to this week's market turmoil.
The prospect of a deal eased massive pressure on Greece in the bond markets and saw shares on the Athens Stock Exchange rebound strongly after days of heavy losses. The market's General Index shot up by 7.71 per cent to 1,839.06 points in afternoon trading, while the spread on Greek 10-year bonds dipped to 6.48 percentage points over their benchmark German equivalent, from a massive 10 percentage points yesterday.
But unions, angry at the prospect of more austerity measures are planning a general strike on May 5 as part of a renewed protest campaign.
Europe's debt crisis ratcheted up a notch or two this week when Standard & Poors downgraded Greece to junk status and cut its ratings on Portugal and much larger Spain.
As global stock markets plunged and the euro dived to a one-year low against the dollar, the powers that be were finally mobilized into action, culminating in a meeting in Berlin yesterday between German Chancellor Angela Merkel, IMF managing director Dominique Strauss-Kahn and European Central Bank president Jean-Claude Trichet.
The consensus in the markets is that a much more extensive package will be offered to Greece than the original one-year €45 billion deal agreed — that has helped to shore up confidence in the markets and Europe's main stock indexes have advanced while the euro has clambered off its recent lows.
Many investors now think that a three-year €120 billion deal may be in the offing.
In Greece, stocks and bonds have enjoyed a rare recent day in the sun on expecations that Germany would stop dragging its feet and push its share of the bailout through parliament by May 7, as promised by Finance Minister Wolfgang Schaeuble.
It's not going to be pain free for Greece, though — Germany and the others will insist on further budget cutbacks over the coming years.
In Berlin, two major German opposition parties said they will not block an aid deal for Greece, helping ensure the funding can be passed through parliament in time for Athens to meet its debt payments.
The current discussions are also likely to lead to more fundamental changes within the eurozone, which has appeared ill-equipped to deal swiftly with a budget crisis within its borders.
Schaeuble has called for the introduction of a mechnanism to allow states to undergo an orderly bankruptcy — similar to the one created for banks after the financial crisis.
"We need something similar for states who are part of a monetary union," the DAPD news agency quoted him as saying. "We have to learn from the crisis."
But Axel Weber, president of Germany's Bundesbank central bank, warned of dire consequences if Greece were permitted to fail. "The effect on financial markets and other states would be unpredictable under the currrent circumstances," he was quoted as saying in the Bild newspaper.
Marco Annunziata, chief economist at UniCredit Group, said letting the €120 billion figure slip meant markets would react poorly to news of anything less.
"This is awful expectation management," Annunziata said. The comments "will further fuel market hopes for a more substantial package than the 45bn euro agreed so far and thereby increase the risk of disappointment.
"The hesitant and haphazard reaction of Eurozone policymakers to Greeces predicament underscores the dangers of contagion," he said. "The eurozone has taken over six months to react and is allowing uncertainty to persist nearly to the eve of the May redemptionsthis does not bode well for their ability to react quickly should a second flashpoint burst.Reuse content