World leaders demanded tough new measures by Greece to control its debt mountain as officials reported that talks on a €120 -billion bailout deal were nearly complete.
Amid lingering fears that the debt crisis could spread, US President Barack Obama, German Chancellor Angela Merkel and the European Union called for resolute action by Greece to control spending.
New signs that Germany is now supporting the bailout helped international share markets and the euro currency stabilise after several days of losses caused by the demotion of Greek debt to “junk” status and the downgrading of Portugal and Spain’s credit rating.
Greek stocks jumped by 5.78% in early trading and the interest rate it pays for new debt fell back below 10% after rising above 11% on Wednesday.
Greece faces a May 19 default deadline to secure new funds.
But after resisting for many weeks a rescue which is unpopular among Germans, Merkel has now signalled support for Greece but demanded greater efforts to cut a public deficit which the EU has estimated at 13,6% of gross domestic product.
Merkel and Obama “discussed the importance of resolute action by Greece and timely support from the IMF and Europe to address Greece’s economic difficulties,” the White House said after telephone talks between the two leaders late Wednesday.
EU commissioner for economic and monetary affairs Olli Rehn said that marathon talks with Greece were nearly complete. But he insisted that Greece had to take effective action.
Rehn said EU aid would be conditional on “implementing the decisions required at every stage to meet the conditions of fiscal consolidation and structural reforms.”
Merkel apparently eased her stance after talks in Berlin late Wednesday with International Monetary Fund chief Dominique Strauss-Kahn and European Central Bank president Jean-Claude Trichet.
The IMF head warned confidence in the entire 16-nation euro area was now “at stake”.
“It is perfectly clear that the negotiations with the Greek government, the European Commission and the IMF need to be accelerated,” Merkel said after the meeting.
“We hope they can be wrapped up in the coming days and on the basis of this, Germany will make its decisions,” she told reporters.
Greece must be rescued to stop the debt crisis spreading to other parts of the euro area, Germany’s central bank chief said Thursday.
“Let me be clear — aid for Greece as a last resort, is in my view the best way to avoid the crisis spreading to other member states and the euro area with extremely negative consequences,” Axel Weber told the Bild daily.
Weber said the effects of letting Greece default were “incalculable” and stressed that expelling Athens from the euro area was “legally not possible.”
“Hard austerity measures in the country will of course not be easy but they will be more bearable than leaving the euro area,” he said.
Signs of a hitch in the talks emerged however when Greek Labour Minister Andreas Loverdos resisted EU and IMF demands to cut bonuses in the private sector. “We have been asked for a cut which we do not accept,” Loverdos told reporters.
Greek media reports said wage and job cuts for public workers would be ordered alongside tax increases to get through what the Kathimerini daily called “three hard years.”
Other countries have been quick to deny that they face the same problems as Greece, despite the downgrades for Portugal and Spain’s credit rating and attention put on Italy’s economy.
French Budget Minister Francois Baroin said: “There’s no risk of seeing our rating lowered.” He said that French bonds remain a “signature refuge” for lenders seeking a safe government client.
“The downgrade of Spanish government debt by S&P is another alarming sign that the effects of the Greek crisis are spreading,” said European economist Ben May at research firm Capital Economics in London.
Standard & Poor’s lowered Spain’s long-term sovereign credit rating to “AA” from “AA+” and said the outlook was negative, meaning there could be a further downgrade.
Spain, with an economy five times the size of Greece’s, has sought to reassure investors.
“I want to send a message of confidence to the population and of calm to the markets,” Deputy Prime Minister Maria Teresa de la Vega said, insisting that Spain was cutting its debts.