Greece resisted market pressure today to seek international help to manage a worsening debt crisis, as new figures highlighted a deepening recession in the economy that will further aggravate its fiscal woes.
After a frantic sell-off of Greek bonds and shares this week due to growing doubts over a joint euro zone/IMF rescue plan, markets caught their breath today, awaiting word from Brussels where EU officials were wrangling over the terms of any emergency loans.
Euro zone officials, including the leaders of France and Italy, sought to reassure markets that a financial safety net for Greece, agreed in principle at an EU summit last month, would be ready if it became needed.
"We are ready to take action at any moment to come to the aid of Greece," French president Nicolas Sarkozy said after talks with Italian prime minister Silvio Berlusconi.
However, an EU source said no deal was likely at today’s talks among deputy finance ministers and central bankers, because many details such as the triggering of the loans and the share each country would pay still have to be sorted out.
Among issues are the interest rates, duration and policy conditions attached to emergency loans.
"There is nothing imminent. There is a lot of agitation, but little that is concrete behind it," the source familiar with the discussions said.
The risk premium on Greek 10-year bonds over benchmark German bunds narrowed slightly and Greek bank shares rebounded by 2.3 per cent after yesterday's 6 per cent fall, but there was no sign that the crisis was easing.
"We are seeing a correction after yesterday's selling pressure, which was overdone. There is buying of bonds today," said a treasurer at a large Greek bank.
Investors were taking profits, closing short positions or bargain-hunting, he said.
Finance minister George Papaconstantinou said bond spreads of more than 400 basis points - which means Greece would have to borrow at more than 7 per cent - did not reflect the real state of the economy or the government's austerity measures.
He said the EU was working to nail down specifics of a last-resort aid mechanism for Greece, but the government would not ask for activation of the rescue plan.
Asked by reporters after meeting prime minister George Papandreou whether Greece wanted the aid plan activated, he said: "No. This issue has not been raised... we have said that Greece does not intend to use this mechanism."
However, financial markets are increasingly betting on an early resort to the rescue fund.
UBS currency strategist Geoffrey Yu said it could be "days, rather than weeks" before the IMF comes to the aid of Greece, and anticipation of a rescue helped the euro recover lost ground against the dollar and yen today.
Greece needs to borrow about €11 billion by the end of May to finance maturing debt and interest payments. Its overall borrowing requirement for this year is €53 billion.
The next test will come on Tuesday, when it will auction €1.2 billion in six- and 12-month T-bills, a government official said.
Goldman Sachs chief European economist Erik Nielsen said in a note issued yesterday he expected an 18-month aid programme by the end of April worth €20-25 billion, co-financed by the euro zone and the International Monetary Fund.
"The IMF will charge a bit over 3 per cent and the Europeans probably 4-5 per cent," Nielsen wrote.
European Central Bank president Jean-Claude Trichet said in newspaper interview that Greece was not at the point where it needed a financial bailout and default "is not an issue".
Mr Trichet added to market confusion yesterday by saying that unsubsidised lending to Greece by euro zone governments simply meant at rates no lower than those at which creditor countries finance themselves.
EU sources say Germany and the Netherlands have argued that emergency loans should be priced at close to current market rates to avoid any moral hazard.
The head of France's Financial Markets Authority, Jean-Pierre Jouyet, said prolonged EU wrangling over the terms of any rescue had unsettled markets.
"Two months of negotiations, that's two months during which the markets are playing with a country," Mr Jouyet told France-Inter radio. "I understand the technical difficulties... (but) the markets have the feeling that there isn't enough political will."
Reuters