Barroso wants EU to agree loans for Greece

European Commission President Jose Manuel Barroso urged EU member states on Friday to agree a standby aid package Greece after Athens said it could turn to the IMF for help.

Barroso said the 16 countries that share the euro currency should be ready to make coordinated bilateral loans to Greece to help it reduce its budget deficit and refinance its debts, which are nearing 120 percent of gross domestic product.

In a move that appeared designed to shake EU member states into action and in particular to win German backing for a rescue package, Barroso said the situation could not be allowed to be go on for much longer and action was needed rapidly.

The European Commission is ready to make a proposal for an instrument for coordinated assistance for Greece, the head of the European Union's executive said in a statement in Brussels.

Such an instrument will be constituted by a system of coordinated bilateral loans and will be compatible with the (euro zone's) no bailout clause and with strict conditionality.

EU leaders will discuss the issue at a summit in Brussels on March 25-26 after Greece said it could not deliver promised deficit cuts if its borrowing costs remained so high and that it may have to seek help from the International Monetary Fund.

Barroso did not say how much aid Greece would need but diplomatic sources put the figure at up to 22 billion euros. Athens has not requested any aid and hopes it will not need it.

But Barroso said Greece's situation could not be allowed to go unchecked and that EU member states, and specifically the euro zone, must work together rapidly.

Our objective is an instrument designed within the euro area with conditions and management established by the euro area and its institutions, he said. I urge all member states to agree as soon as possible on this instrument... We believe we cannot prolong any further the current situation.

MARKET UNCERTAINTY

Barroso said creating such a support mechanism did not imply that it would be activated immediately. He declined to discuss whether the IMF would contribute to the scheme but European diplomats said the Commission has not ruled this out.

Despite the EU's verbal assurances of support, investors fear it could prove impossible to construct a euro zone financial safety net for the currency area's most heavily indebted member, largely because of German reluctance.

Market doubts about a rescue plan pushed the euro to a one-week low on Friday while the premium investors demand to buy 10-year Greek government bonds continued to rise.

A French government source said France's priority was to find a European solution for the Greek debt crisis, adding that talk of a loan from the IMF was premature.

Some countries would see calling in the IMF as a sign of weakness that damaged the eurozone's credibility.

But Berlin said it did not rule out IMF aid, easing its resistance to any solution to Athens' debt woes coming from outside the European family.

At this time, in which no decisions have been made and no decisions are in the pipeline, the government has not excluded IMF aid, government spokesman Ulrich Wilhelm said. Each country can decide on its own whether to request IMF aid.

EU diplomats say this softening reflected mostly domestic political and legal pressures against a euro zone rescue, although Finance Minister Wolfgang Schaeuble's spokesman said he was lukewarm about the idea of IMF help.

German Chancellor Angela Merkel, facing public opposition to bailing out Greece before a regional election in May, has taken the hardest line against any EU rescue arrangement.

The bloc is divided. While the Netherlands and Italy have said the IMF should not be ruled out, leaders of France, the Eurogroup of finance ministers and the European Central Bank have said it would be a blow to economic and monetary union.

GREEDY LENDING

Greek Prime Minister George Papandreou appealed to unions, which have staged strikes and street protests against austerity measures, to support his efforts to escape the debt crisis.

With full honesty toward Greeks, we talked about the point we have reached -- one step before being unable to borrow, Papandreou told the country's biggest union, GSEE.

We must avoid paying usurious interest for decades, condemning the country to a deep recession, he said.

The premium investors demand to buy 10-year Greek government bonds rather than German Bunds continued to rise on Friday, with the 10-year Greek/German government bond yield spread widening as far as 333 basis points from 318 at Thursday's settlement.

Economists say such rates would compound Greece's problems in a year when it has to raise 53 billion euros ($72.4 billion), 20 billion of it in refinancing between April 20 and end May.

Papandreou said on Thursday he wanted a decision at next week's summit on a plan for financial support if needed, saying a visible EU mechanism could force market rates down and make it unnecessary for Greece to go to the IMF.

Athens aims to shrink its budget deficit by four percentage points to 8.7 percent of GDP this year, with its economy seen contracting by 2 percent, based on central bank projections.

(Additional reporting by Marcin Grajewski, Sophie Hardach and James Mackenzie in Paris and George Georgiopoulos in Athens; writing by Mike Peacock, Timothy heritage and Luke Baker; Editing by Angus MacSwan)