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Officials iron out details of financial bailout plan for Greece

Greek Finance Minister George Papaconstantinou talks to the media after meeting with the prime minister Friday in Athens. 

Associated Press

Greek Finance Minister George Papaconstantinou talks to the media after meeting with the prime minister Friday in Athens. 

ATHENS, Greece — Greece faces the very real prospect that it will need a bailout to prevent the country from defaulting, but markets have been on edge as officials work out details on how a rescue would be carried out.

Greek Finance Minister George Papaconstantinou said Friday that key aspects of a previously agreed upon rescue plan by eurozone countries and the International Monetary Fund were being hammered out, even as he insisted that no bailout will be needed.

The vaguely worded rescue plan agreed upon in Brussels on March 25 would provide Greece with loans from other eurozone governments and the International Monetary Fund.

European Union sources said Friday night that a decision had been made on how the interest rates for the loans would be calculated.

One source said they would be similar to those on IMF loans, which tend to be lower than market rates. The loans would probably be three-year or short-term loans rather than a 10-year loan, and a final decision would be made by the eurozone finance ministers, who are to meet in Madrid on Friday.

The sources spoke on condition of anonymity because of the sensitivity of the talks.

A rescue would be an admission by the European Union that the rules set up to safeguard its 11-year-old euro currency haven't been strong enough to weather a crisis.

But prospects of a default could be worse, since it would damage Greece's ability to borrow for years and hit European banks holding Greek bonds with new losses.

The interest rate gap, or spread, between Greek 10-year government bonds and the German equivalent, considered a benchmark of stability, narrowed to below 4 percentage points, after spiraling to 4.8 percentage points Thursday, the highest since Greece joined the euro. The higher the spread, the lower the market confidence in Greece's ability to pay.

Those interest rates, even at Friday afternoon's slightly lower levels, still translate to a cost of borrowing of about twice that of Germany's — costs that Athens has said it cannot afford for long.

Both Athens and European officials insist no rescue is needed yet and that Greece will not default.

"We have said that Greece does not intend to make use of the mechanism, but it is very important for our country for this safety net to exist," Papaconstantinou said.

While France and Italy offered support, the key question is Germany, where Chancellor Angela Merkel has been a chief opponent of bailing out Greece.

At her insistence, the loans also need unanimous approval of all 16 eurozone members, and Greece would not get a break on interest rates.

Greece has been spending beyond its means for years, leaving it with a huge budget deficit of 12.9 percent of economic output. Athens has pledged to reduce its deficit to 8.7 percent this year, and has pushed through a harsh $6.5 billion austerity program.

Officials iron out details of financial bailout plan for Greece 04/09/10 [Last modified: Friday, April 9, 2010 10:27pm]
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