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Greece, others, move to quash rumors about bailout

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MATT MOORE | January 29, 2010 02:23 PM EST | AP

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DAVOS, Switzerland — Greek and European officials moved Friday to quash market buzz that Athens could find itself in too deep a financial hole to save itself, potentially saddling European governments with a costly bailout.

Prime Minister George Papandreou and the EU denied reports that European governments had engaged in bailout discussions, stressing that Greece itself must carry through on its plans to cut an alarming deficit.

"Any discussion of a 'Plan B' is simply not in our vocabulary," said Greek Finance Minister George Papaconstantinou at the World Economic Forum in Davos, Switzerland, where he and Papandreou have been giving assurances of their determination to carry through on a difficult plan to get spending under control in the next several years.

"We're not going to be drawn into this, we're not going to participate in it," Papaconstantinou said during a meeting with reporters. "We're going to do what needs to be done to reduce the deficit."

The Greek crisis represents a crucial test for the European Union since a default, or a bailout that prevents one, would be a serious blow to the credibility of the euro. Membership in the shared currency demands that governments keep their budgets under control.

Financial markets, it is feared, would respond to a default by selling off the bonds of other struggling euro governments. That would make it more costly for them to borrow money, deepening their predicament.

Spain, Portugal and Ireland also have large deficits, with Spain announcing Friday that its budget gap had swollen to 11.4 percent of gross domestic product from an earlier estimate of 9.4 percent.

Greece's deficit is at an estimated 12.7 percent in 2009 though the government has pledged to bring it below 3 percent by the end of 2012.

Greek officials have spent much of this week trying to douse speculation and rumors, and talking up Greece's plans for bringing its finances back in line with European Union guidelines.

"Greece is in a situation where we need to take very strong measures and structural changes in our country," Papandreou said. "We need to restore confidence ... We're determined to implement the program."

Asked about speculation that EU member states could provide some as yet undecided aid, he demurred.

"Talking about theoretical possibilities could end up becoming self-fulfilling prophecy," he said.

European Union officials in public are offering only tough love, stressing that Greece must fix its problems, although economists tend to think that if a bailout were needed it would be forthcoming.

"There's no bailout. There's no way out," French Finance Minister Christine Lagarde said, after a closed-door meeting with European Commissioner Joaquin Almunia and European Central Bank President Jean-Claude Trichet.

Almunia said that Greece had presented a program to rectify the imbalances and called it a "very ambitious" program.

"We are preparing recommendations to help the Greek authorities to implement 100 percent of this program," he said, adding the country would have EU support and faced no risk of being booted from the euro zone.

"Nobody that knows some details about what the euro zone is would consider that any country – Greece or any other – will leave the euro zone," he said. "On the contrary, there are quite a few EU members that are knocking on the door. They want to be in the euro area."

Dominique Strauss-Kahn, chief of the International Monetary Fund, said Greece has much to do but that institution was ready to intervene, if asked.

"The country is in a difficult situation. The European authorities, including those in Brussels and at the European Central Bank, are working on it," he said. "We at the IMF are ready to intervene if asked, but that is not a forgone conclusion and I think that inside the euro zone, there will be enough solidarity to deal with it."

German Economy Minister Rainer Bruederle said Greece had to fix its problems. "British or German taxpayer cannot finance the failures of others. That is not a community," he said at Davos. "Solidarity also means everybody adheres to common rules."

In spite of the determined talk from Greek leaders, markets remained decidedly uncertain.

Concern about Greece's stability, and its financial future, pushed the yield on its 10-year bond to 7 percent on Thursday, bringing the spread over the equivalent German government bond – a benchmark of solidity – to near 4 percent – an unprecedented and record difference.

Germany, the EU's biggest economy and world's second largest exporter, would most likely be the one to intervene with help to plug Greece's deficit gap, were it ever to come to that.

Concerns about Greece have dogged the euro, which slid to a six-month low of $1.3913 on Friday, well below the 16-month high of $1.5144 set back in November.

Yields – a measure of risk – fell modestly on Friday after EU finance chief Almunia said there was no threat of a Greek default and Papaconstantinou's denials of bailout talks.

"While the official rhetoric is having the desired effect of limiting the damage on Greek yields, action speak louder than words and it is by no means clear that that the Greek electorate have the appetite for the severe spending cuts needed to bring the budget back in line," said Jane Foley, research director at Forex.com.

In Athens, Greece's stock exchange was up 2 percent in midday trading Friday.

"There's been a change in rhetoric in support of Greece," said Platon Monokrousos, head of financial markets research at EFG Eurobank in Athens.

Though, talk of a bailout has been dismissed, the idea continues to gain increasing traction in the markets.

"I believe Greece will be bailed out if necessary because the implications of not doing so are hard to imagine," said Kit Juckes, chief economist at ECU Group.

It's not just Greece facing the skeptical eye of the markets.

"If fears of contagion become widespread, risk-averse investors could start to gun for even the larger or 'stronger' euro zone economies and their debt," said Geoffrey Yu, a currency strategist at UBS.

"Spain, Italy, Austria and Belgium – together accounting for more than 35 percent of the euro zone economy versus just over 6 percent for Greece, Portugal and Ireland combined – may then be next in the firing line," he added.

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Associated Press writers Aoife White in Brussels, Emma Vandore in Paris, Pan Pylas in London, Elena Becatoros and Nicholas Paphitis in Athens and Bradley S. Klapper and Angela Charlton in Davos, Switzerland, contributed to this report.