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WRAPUP 3-Europe divided on aid to Greece before summit

By Erik Kirschbaum BERLIN, March 21 (Reuters) - European leaders sent out conflicting signals at the weekend over aid to Greece, with Germany's Angela Merkel urging Athens to solve its debt problems alone and Italy's Silvio Berlusconi strongly backing EU support. The comments were the latest sign of divisions within the 16-nation euro zone over whether and how best to provide financial help to Greece, whose struggles to cope with soaring debt and deficits have plunged the currency bloc into the deepest crisis of its 11-year existence. Chancellor Merkel, who faces a state election in May, is keenly aware that the German electorate overwhelmingly opposes a bailout for Greece and has hardened her line against the EU making a concrete pledge of financial support. That stance pits her against Brussels and major European partners, who favour strong action to end a speculative assault on Greek assets that has deepened the country's woes by pushing up its cost of borrowing to more than twice that of Germany's. Speaking on Deutschlandfunk radio, Merkel denied Greece had any "acute financial needs" and rejected suggestions by European Commission President Jose Manuel Barroso that EU leaders agree a standby aid package for Athens at a summit this week. "I don't see that Greece needs money at the moment and the Greek government has confirmed that. That's why I'd urge us not to stir up turbulence in the markets by raising false expectations for Thursday's council meeting," Merkel said, referring to the March 25-26 summit. "Aid will not be on the agenda at the meeting on Thursday because Greece says itself it doesn't need help right now." Barroso responded in German daily Handelsblatt, saying the EU urgently needed to resolve the Greece problem "regardless of the political agenda in member states". "Securing the stability of the currency union is in Germany's interest," Barroso said in an interview to appear on Monday. "I'm sure Germany will make a constructive contribution to resolving the current crisis." Italian Prime Minister Berlusconi, whose own country has long been considered one of the weak links in the euro zone, told Reuters at an election rally in Bologna on Sunday that he was "absolutely in favour" of the EU providing aid to Greece. He later hardened his stance, saying the European Union had "no reason to exist" if its members were not ready to help a crisis-hit euro zone country. Italy's debt-to-GDP ratio is similar to that of Greece. It is projected to hit 117 percent this year, compared to the 120 percent level forecast for Greece, although Rome has managed to keep a lid on its budget deficit and has weathered the financial crisis better than others in Europe. EURO FALLS, SPREADS WIDEN Uncertainty over European support for its weakest link pushed the euro as low as $1.3502 on Friday, its weakest level in over two weeks. The spread between Greek bond yields and those of German benchmark issues ended the week at 325 basis points, the highest level in nearly three weeks. Some members of the euro zone believe the bloc itself should help Greece sort out its problems, but others, including Germany, are not ruling out a role for the International Monetary Fund (IMF). Germany is worried direct aid could set a dangerous precedent for other euro zone members in financial difficulty. It is also concerned such support could be challenged in the country's Constitutional Court because EU rules expressly forbid a bailout of a single currency member by its euro zone partners. Until now, Greece has not formally asked fellow members of the currency bloc for funds, keen to see if its austerity plans restore confidence in its finances, precluding the need for aid. But Prime Minister George Papandreou warned on Friday that his country was "one step from being unable to borrow". Unicredit economist Marco Annunziata said in a research note that with debt redemptions looming in April and May, Greece would likely require aid pledges soon from either the EU or IMF. DITHERING AND BICKERING "Greece has made it clear that it does not want to keep borrowing at current spreads after having announced a major fiscal package -- and most importantly, it probably wants to avoid the risk of spreads blowing out further as we get closer to the April redemptions, at which stage help would need to be provided in a true crisis response mode," he said. "There is no shame in calling in the IMF, indeed it is the most efficient solution. The shame is having failed to ensure fiscal discipline and then spent months dithering and bickering on how to react -- this will likely prove to be a further blow to the euro." Angel Gurria, secretary general of the Organisation for Economic Cooperation and Development, told a Greek newspaper on Sunday that joint EU and IMF support would be the best solution to the country's debt woes. "I consider the best way is a combination of support, funding and guarantees," he told Kathimerini. "In this combination I see the IMF as well." German President Horst Koehler, a former head of the IMF, said it was time to start "thinking the unthinkable" and setting up an insolvency mechanism for nations that are unable to manage their debts. "We need an orderly insolvency process not only for companies but also for nations," he told German magazine Focus, without naming specific countries. ((For a new Interactive Factbox on Greece and its economy please click on http://link.reuters.com/muc64j )) (Additional reporting by Stephen Jewkes in Bologna, Silvia Ognibene in Florence, writing by Noah Barkin; Editing by Jon Hemming) Keywords: EUROZONE/ (noah.barkin@reuters.com; +49 30 2888 5091; Reuters Messaging: rm://noah.barkin.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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