Greece said on Tuesday it expects a positive outcome at this week's EU summit to its request for a European financial safety net despite Germany's insistence that aid will not be discussed.

Finance Minister George Papaconstantinou said he was encouraged by comments from European Union institutions about ways to support Greece's efforts to cut its huge budget deficit and public debt and reduce its borrowing costs.

Based on these statements, we expect a positive result on Thursday, he told an investment conference in Athens.

There must be a political mechanism to ensure the stability of the euro zone and support the efforts made by every country, he said, adding that data for the first two months of 2010 show Greek revenues rose and spending fell sharply.

But there was no public sign that Chancellor Angela Merkel, facing massive public opposition to any bailout ahead of a regional election in May in which her center-right coalition's upper house majority is at stake, was willing to relent.

The risk premium that investors charge for holding Greek debt rather than German bonds narrowed after his comments to 327 basis points from around 344 at Monday's settlement close, although it was still above last week's levels.

The Greek Finance Minister's statement of higher revenues, lower spending and commitment to choosing a European solution to the country's debt crisis if at all possible, are all positive for Greek bonds and helping contract spreads over Germany, said a senior bonds trader in London.

Greece needs to refinance some 16 billion euros in maturing debt between April 20 and May 23 and is hoping that a public display of an EU emergency support mechanism, which would not need to be activated, will be enough to force down the cost.

NO CONCESSIONS

The crisis over Greece's debt, expected to hit 120 percent of national output this year, and its budget deficit, which reached 12.9 percent of GDP last year, has shaken confidence in the euro single currency.

The euro dipped further against the dollar on Tuesday as Germany and its European Union partners continued to wrangle over whether euro zone countries need to agree on a fallback mechanism for Greece.

German Economics Minister Rainer Bruederle said a stable euro was in the national interest, adding that the single currency's image should not be damaged.

But German coalition leaders meeting in Berlin voiced full support for Merkel's strict rejection of any EU aid for Greece.

Hans-Peter Friedrich, floor leader of the Bavarian Christian Social Union, sister party of her Christian Democrats, said it was great to see the chancellor standing her ground and not letting herself be forced into any concessions.

European Commission President Jose Manuel Barroso, usually cautious with the EU's most powerful leaders, has publicly challenged Merkel to agree this week on a support mechanism for Greece, warning that continued uncertainty would harm the euro.

Diplomats said European Council President Herman Van Rompuy, who will chair Thursday's summit, was working for a compromise that would satisfy Merkel and prevent the bloc's divisions over Greece spilling into the open again and destabilizing markets.

The nominee for vice-president of the European Central Bank, Vitor Constancio, pointed to a possible solution, telling a European Parliament hearing that giving Greece credit would not be an illegal bailout if the loans were not subsidized.

Austrian Finance Minister Josef Proell warned in a newspaper interview that failure to help Greece could have a domino effect on neighboring central and eastern European countries where his country has big financial interests.

Nobody can estimate what domino effect a bankrupt Greece would have, especially on the states of central and eastern Europe, Proell told the Salzburger Nachrichten. And this is exactly where Austria has very heavily invested.

Papachristou stressed that Greece was not bankrupt and was not going to the EU summit as a beggar.

We want to play by euro zone rules. Greece has full access to financial markets as it proved with its recent 10-year bond sale. Obviously, we would like the spreads to fall but I believe this will gradually happen as the stability programme is implemented, he said.

Greek officials also stressed they were looking for a European solution and would consider seeking International Monetary Fund help only as a last resort if euro zone support was not forthcoming.

The IMF is a theoretical borrowing possibility for all countries. This is a fact, government spokesman George Petalotis told state radio.

We do not want to go to the IMF and this is a fact too. We want to see a solution to our financial problem with the European Union framework, he added.

Germany European union International Monetary Fund