The European Union urged Greece on Monday to announce new austerity measures within days to tackle a debt crisis that has shaken the euro zone and promised to help Athens overcome the problem. EU Economic and Monetary Affairs Commissioner Olli Rehn made the call after a first round of talks with Greek officials amid growing market expectations of a trade-off between new deficit cutting steps and practical EU support for Greek borrowing. “I'm sure that together we shall overcome these formidable economic and fiscal challenges,” Rehn said after meeting Finance Minister George Papaconstantinou. [nATH005236] A German government spokeswoman, however, maintained that it was up to Greece to pursue budget consolidation to win the confidence of markets and said that Berlin had nothing new to report on the issue of Greek debt. Prime Minister George Papandreou appeared to be preparing the nation for more sacrifices in broadcast remarks to a cabinet meeting dramatising the crisis and appealing for public support. “Today we ask Greek men and women to enlist in our common cause to save our country and the overwhelming majority of our citizens are willing to do it despite the price amd despite the burden ... Everybody says yes,” Papandreou said. [nATH005233] Greece's borrowing costs tumbled to their lowest level since mid-February on expectations that the government will agree to new tax increases and spending cuts to plug a budget gap which EU experts say has widened due to a lingering recession. That in turn could trigger practical EU support for Greece's effort to borrow or refinance about 25 billion euros ($33.97 billion) by late May, possibly through public guarantees of banks' purchases of Greek sovereign bonds, EU officials and German lawmakers said. “We seem to be getting closer to a deal on Greece in some shape or form,” said Nomura rate strategist Sean Maloney. Greek bank shares rose by 4 percent on hopes of a deal. Fellow euro zone southern rim countries Portugal, Spain and Italy also saw their debt spreads over benchmark German bonds narrow on Monday. Rehn and European Central Bank chief economist Juergen Stark planned a day of talks with Greek leaders on additional steps demanded by the EU to slash Greece's deficit by 4 percent of gross domestic product this year to 8.7 percent. The Socialist government has already announced two waves of deficit-cutting measures this year, including a public sector pay freeze and cuts in top-up pay, tax increases, a crackdown on tax evasion, higher fuel duty and public spending cuts. But Papandreou, whose approval ratings remain high despite a 24-hour general strike against his austerity plan last week, has promised additional measures if necessary to meet the ambitious deficit reduction target. Among measures under consideration are an increase in Value Added Tax, a luxury goods tax, a further fuel duty hike and possible further cuts in public spending, Greek officials said. Greece's public debt is forecast to hit 120 percent of GDP this year, the highest ratio in the euro zone. The executive European Commission is due to give a first interim report on implementation of the Greek consolidation plan to EU finance ministers on March 16. In parallel, discreet talks are going on among euro zone governments on possible mechanisms to support Greece if necessary on the international bond markets, EU sources say. German Chancellor Angela Merkel, whose country would bear the brunt of any joint action as Europe's largest economy, stressed in a TV interview on Sunday that no decision had been taken and that Greece must put its own house in order. Merkel said the euro was in the most difficult phase since the single currency's creation. She referred to the so-called “no bailout” clause in the EU treaty did not explicitly rule out the possibility of guaranteeing Greek debt through state-owned financial institutions. Greek bonds have been under attack since the new government revealed in October that the 2009 budget deficit would hit 12.7 percent of GDP, more than twice its predecessor's forecast and four times the EU ceiling. Some of those attacks have involved hedge funds and investment banks using the volatile and unregulated credit default swaps (CDS) market to buy insurance against the risk of a default or debt restructuring, traders say. Euro zone officials stepped up threats to crack down on speculation against European sovereign borrowers. “If the Greeks hold on to the strict parameters and the markets continue to speculate against Greece, we will not let them just march through,” the head of the Eurogroup of finance ministers said.
