Divided EU seeks pre-summit deal on Greek debt

European Union leaders were striving on Thursday to reach a last-minute agreement on how to help Greece resolve its debt crisis and reassure investors before what was likely to be a tense summit.

European diplomats said European Commission President Jose Manuel Barroso had met Greek Prime Minister George Papandreou on Wednesday evening and telephone diplomacy was in full swing but differences remained over whether to offer Greece a safety net.

They are inching forward, one EU source said, adding that euro zone leaders could still agree to hold a special meeting on Greece after the first day of summit talks between all 27 EU leaders ended in Brussels.

Efforts to arrange a special meeting of the 16 countries that use the single currency had failed by late Wednesday, with France and Germany discussing what role the International Monetary Fund might play and what form extra contributions by euro zone states could take.

Germany does not want to have a meeting of euro zone leaders unless there is a definite chance for a deal, an EU diplomat said.

Worried by the signals this would send, another envoy said: If there is no meeting of euro zone leaders, we can expect markets to see that negatively as a sign that the Europeans are unable to reach an agreement (on Greece).

Athens revealed a huge budget deficit last October, shocking investors who sent Greek borrowing costs soaring while it tried to get the deficit down with unpopular austerity measures.

It needs to borrow some 16 billion euros between April 20 and May 23 alone to refinance maturing debt at twice the rate Germany has to pay to borrow.

Greece says it needs only a standby aid package to reassure nervous financial markets and that it can get by without having to resort to using the money that is set aside for it.

But Germany, Europe's biggest economy, faces public opposition to any bailout for Greece before a regional election in May and fears any financial assistance would face a legal challenge at home.

As a condition for any support package, Chancellor Angela Merkel also wants EU rules to be rewritten to provide harsher punishment for deficit sinners.

CONTAGION

The euro fell more than 1 percent against the dollar on Wednesday to $1.3335, its lowest since May 2009, and continued heading south on Thursday.

Portuguese shares also fell and the risk premium on Portuguese and Greek debt over German bonds widened after Fitch downgraded Portugal's sovereign debt rating by one notch to AA- on Wednesday, reflecting a deterioration of the rating agency's confidence in Portugal's economy.

EU leaders are concerned debt-servicing problems could also hit other countries in the euro zone including Portugal, Spain or Italy and fear the unity of the 27-country bloc, which represents 500 million people, will suffer long-term damage.

The EU should show solidarity with Greece and work out a common position which would end all market speculation. A quick decision by the EU would offer the best help, said Polish Prime Minister Donald Tusk, whose country does not use the euro.

A senior European envoy said the divisions reflected wider battles among EU institutions and member states.

It's hard to see how we can break out of this rather bleak economic picture. Inter-institutional relations have taken a downturn, the envoy said.

The Greek debt crisis is not formally on the summit agenda, despite pressure to discuss it from the executive European Commission along with the main theme of creating jobs and boosting economic growth.

Diplomats also said no euro zone leaders' meeting was planned on Greece before the EU heads of state and government leaders start meeting around 1600 GMT.

But euro zone leaders might meet on Thursday night, after the end of the first day of summit talks, if an agreement is within reach, they said. Leaders could also hold of bilateral meetings on Thursday night if there was a chance of a deal.

Involving the IMF in the euro zone divides supporters and opponents of closer European integration.

Luxembourg Foreign Minister Jean Asselborn told Deutschlandfunk German radio that calling on the IMF for financial aid would damage the euro.

By giving up responsibility to the IMF for the health of a euro zone member, he said, they would be moving from political psychology to indulging in political psychiatry.

France has until now resisted any role for the Washington-based lender inside the common currency area, saying it would be a political humiliation and signal to markets that the euro zone was incapable of solving its own problems.

But diplomats said Paris now seemed willing reluctantly to concede a role for the IMF as the price for securing German backing for a rescue mechanism.