Germany Weighs Greek Support in Pre-Summit Switch

By Brian Parkin and Jonathan Stearns

Feb. 10 (Bloomberg) -- German officials are considering assistance for Greece after the country’s fiscal woes threatened the stability of the euro and financial markets, two lawmakers from Chancellor Angela Merkel’s governing coalition said.

German 10-year government bonds dropped by the most in three months today and their Greek counterparts soared as prospects of a rescue firmed. Finance Minister Wolfgang Schaeuble, who met lawmakers in Berlin today, told reporters he “no intention to participate in speculation.”

The German initiative came on the eve of a European Union summit and followed a slump in bond prices amid speculation that Greece would fail to tackle the EU’s largest budget deficit. The euro’s slide to a nine-month low and a slump in bond prices prompted leaders to drop their resistance to rescuing Greece and protect the rest of the euro region from market turmoil.

Schaeuble will give a speech on tax policy and financial markets in Berlin at 5:40 p.m. local time. Merkel is not scheduled to make any public comments today.

“We are considering support,” Michael Meister, financial- affairs spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said yesterday.

“We are talking about support in the broad sense,” Olli Rehn, the EU’s economic affairs commissioner, said yesterday. Meister said aid would come “under strict conditions and if the Greek government undertakes far-reaching state reforms.”

EU leaders arrive in Brussels tomorrow morning for the summit, which will be hosted by EU President Herman Van Rompuy. While Greece isn’t officially on the agenda, he will discuss the current “economic situation” over lunch, a session traditionally devoted to the most-sensitive subjects.

Paris Meeting

Greek Prime Minister George Papandreou, who is scheduled to meet French President Nicolas Sarkozy in Paris today, has failed to convince investors that his plan to cut the EU’s biggest deficit will work. His challenge will be highlighted today when unions shut schools, hospitals and flights to fight his proposals.

For weeks, European officials have insisted that no bailout was planned and that Greece’s effort to reduce its deficit, estimated at 12.7 percent of gross domestic product, should be given a chance to work. EU policy makers have no “plan B” to help Greece, former Monetary Affairs Commissioner Joaquin Almunia said in a Jan. 29 interview.

Signs of a rescue helped ease investors concerns that Greece’s worsening finances would derail the global recovery. The risk premium investors demand to buy Greek debt over comparable German bonds tumbled for a second day to 2.69 percentage points, the lowest since Jan. 19. It reached as high as 3.96 percentage points on Jan. 28.

Timing

The euro slid 0.2 percent to $1.3766 at 10:02 a.m. in Frankfurt after rallying more than 1 percent yesterday. The yield on the German bund earlier jumped 9 basis points to 3.24 percent.

“I’m not surprised it happened, just by the timing of it,” said Julian Callow, chief European economist at Barclays Capital in London. “They would have to structure it in a way that it’s sufficiently penal so as not to create a moral hazard issue and encourage other countries like Portugal, Spain and Ireland to keep on track in terms of getting their own houses in order.”

German government spokesman Ulrich Wilhelm said in a statement yesterday that reports that a decision to offer Greek assistance had “virtually been taken” were “unfounded.”

Germany and other EU nations were considering offering Greece and other debt-ridden euro-area members loan guarantees, the Wall Street Journal reported yesterday, citing people familiar with the matter.

Legal Issues

In the interview in Strasbourg, Rehn, pointed to tomorrow’s summit and a meeting of European finance ministers next week and indicated that Greece will be held to strict conditions in exchange for any backing.

“Solidarity goes both ways,” Rehn said. “I am sure that in the next couple of days we will see discussion and decisions to this effect.”

EU law bars the European Central Bank or national central banks from bailing out EU countries through buying their debt or offering loans, according to a report by the German parliament’s research unit published today.

Options for Greece include bilateral aid or a package put together by a group of countries using the euro, Meister said.

Nobel laureate Joseph Stiglitz said Greece’s budget-deficit reduction plan will prevent a default, and he reiterated his call for the European Union to aid the nation against “speculative attacks” in financial markets.

“I’ve been very impressed with the comprehensive approach they’ve had,” Stiglitz said in an interview on Bloomberg Television in London yesterday. “There’s clearly no risk of default. I’m very confident about it.”

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Jonathan Stearns in Strasbourg, France at jstearns2@bloomberg.net