The euro is under siege -- and the next few days will be crucial.
Financial markets are betting heavily that Greece's crushing debt could drag down the euro currency and force reluctant EU leaders into an embarrassing bailout.
Investors are pressing EU leaders to state clearly what they would do if Greece were to face default -- and eyeing up other indebted nations such as Portugal, Spain, Ireland and even richer countries such as Italy and Belgium.
For weeks, EU leaders as well as France and Germany, who would likely lead any rescue, have denied one will be necessary.
Their tune appeared to be changing Tuesday, and stock markets in the U.S. and Europe rose on anticipation of some kind of support.
Bernard Valero, a spokesman for France's foreign minister said Tuesday that "we must help" Greece. "It's about helping a friend ... we are the European family." He did not give any details of that help.
European Union leaders will issue a statement on Greece's debt crisis during a Thursday meeting, officials said Tuesday, but added the contents had not yet been discussed and would not say if it would lay out details of a possible bailout.
With the euro sliding to an eight-month low against the U.S. dollar and markets increasingly pessimistic, a simple statement of support for Greece -- already made several times in recent days -- may not be enough.
"Thursday's EU summit is the real litmus test," said VTB Capital analyst Neil MacKinnon. "If it fails to come up with any debt restructuring package or a quasi-bailout, then the pressure on the euro will increase."
An unprecedented bailout for a euro member would be a blow to monetary union by showing that the framework set up to support it was insufficient to ward off a crisis. With budgets in the hands of 16 separate governments, the euro relies on a set of rules limiting deficits to 3 percent of gross domestic product. Large deficits can undermine a currency.
Continued market skepticism about government finances mean that Greece and other troubled countries are already paying higher interest rates to borrow.
That could force them to intensify austerity measures -- less spending and more taxes -- that could cut wages, particularly in the public sector, and reduce or eliminate any economy stimulus for flagging growth.
MacKinnon said traders' bets against the euro have now reached a record. Some of those short trades, reported by the U.S. Commodity Futures Trading Commission, will have been unwound as the euro rose Tuesday but the data suggests market sentiment is at a turning point.
Markets reacted well to news that European Central Bank President Jean-Claude Trichet would leave a banking conference in Australia to attend the EU summit -- which they saw as confirmation that a bailout would be discussed.
European stocks inched up on Tuesday, and the euro rose by three-quarters of a cent to $1.3725, down from $1.51 in December. Spreads on Greek bonds fell 30 points to just under 320 basis points as markets saw less chance of Greek default. The Greek stock market also rose by 4.5 percent.
The bounce followed news that European Central Bank President Jean-Claude Trichet had left a banking conference in Australia to attend the summit, stoking expectations of some kind of backstop for Greece.
But HSBC analysts were skeptical that the talks could stop the slide in euro pessimism saying "we'd be greatly surprised if those meetings concluded in a manner which diminished market concerns about the matter."
Meanwhile Greece tried to calm worries over a default with government talks on accelerating planned budget cuts with reforms to pensions and wages. Greece insists that it does not need a bailout.
Greek Prime Minister George Papandreou visits Paris on Wednesday for talks with French President Nicolas Sarkozy on the debt situation. The bailout options are limited -- but not impossible. European Union agencies -- such as the European Commission -- can't take on debt for governments.
Neither can the European Investment Bank, it said in a statement Tuesday. The EU-government backed lender said that it cannot bail out Greece or any other European country that can't pay its debts and could "only finance economically viable projects."
The EIB said its rules would not allow it cover a budget deficit or join a financial rescue. It has euro75 billion ($103 billion) to lend for infrastructure and economy projects, usually in poorer EU nations.
Three EU members that don't use the euro -- Hungary, Latvia and Romania -- have secured bailouts from the International Monetary Fund and the EU. But EU officials say that IMF help won't be needed for a euro country.
That leaves the ball in the court of EU governments. Legally, they can do it if a member state "is seriously threatened with severe difficulties caused by ... exceptional occurrences beyond its control."
EU governments could cut the costs of Greek spreads overnight by agreeing to jointly underwrite Greece's debt -- but this could hike the cost of their own borrowings.
They could also provide a loan to Greece -- but it is uncertain that they could or would provide enough to give Greece some long-term relief. Greece is looking to borrow some euro51 billion from bond markets to pledge its budget gap this year.
Another option would be bonds, issued jointly by European governments to raise money from markets. EU and ECB officials have talked this down but European socialists are keen -- including Greece's current government -- because it could ease harsh spending cuts.
What is clear is that EU nations do not want to let Greece off the hook -- and that any option would force Greece to make long-delayed reforms to rife tax evasion, rigid labor market rules and an inefficient and high-spending pension and health care system.