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February 10, 2010

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EU perplexed over way out of Greece crisis

MARKETS somehow expect the European Union to backstop Greece's sagging finances. But with officials denying a bailout is needed, the precise path out of the crisis for the EU's incoming new leadership remains fogged with uncertainty.

The EU's own government-backed lender yesterday said it cannot bail out Greece or any other European country that can't pay its debts.

The European Investment Bank said in a statement that it could "only finance economically viable projects" and that its rules would not allow it to help an EU nation cover a budget deficit.

That narrowed the options as Europe's currency union faces an unprecedented crisis as financial markets and the euro have tumbled in recent weeks - with the euro now trading near an eight-month low against the United States dollar - on worries that Greece might need a financial rescue to cope with its soaring debt and deficit.

European stocks inched up yesterday, and the euro rose by three-quarters of a cent to US$1.3725, on speculation that heads of state and government will have to announce some measure to help Greece when they meet at a summit in Brussels tomorrow.

Fears about Greece's financial stability have hiked the cost of Greek borrowings and upped the pressure on other countries in the 16-nation eurozone that are running massive deficits, such as Portugal, Spain and Ireland.

Jittery markets are piling the pressure on EU nations to state clearly what they would do if a euro member is likely to default. Officials have not managed to calm these market worries with repeated assurances from both the EU and the Greek government that Greece can pull itself out of its debt crisis with a harsh austerity program of cuts to public spending that have already triggered strikes and protests.

The crisis shows one of the vulnerabilities of the 10-year-old currency union, in that it lacks an effective central authority to enforce limits budget spending. 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.


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