EU officials arrived in Greece on Wednesday for an inspection visit, hours after ECB Executive Board member Juergen Stark was quoted as saying the bloc would not bail out Greece if its debt problem worsened.
The government's broad outline of how it will get out of its fiscal mess has not impressed markets, making the talks with Brussels on the details of a long-term budgetary plan Greece must submit by end January a sensitive point for investors.
The EU officials are here (at the finance ministry), they are looking at the draft of the plan, a senior finance ministry official said. They will meet in the coming days officials from the health, labor, defense, and economy ministries.
In a sign of increasing pressure on Greece to get its finances back in order, Stark told Italian newspaper Il Sole 24 Ore that EU states would not help out.
The markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece, Stark said in the newspaper.
Greek bond spreads widened slightly in response to the report, which helped to push the euro down for a short time. But analysts said Stark's comments did not necessarily mean the EU would refuse to assist Greece if aid became necessary to prevent a debt default.
They said Stark was probably using tough rhetoric in an effort to press the Greek government, and Greek public opinion, into accepting major public spending cuts to bring the country's budget deficit down to levels permitted for euro zone states.
I'm very confident that were help to be needed, it would be there because there's so much at stake for the euro area, said Jacques Cailloux, euro zone economist at RBS.
The trigger point is if you see contagion in the periphery countries that could affect the core countries...If there was a contagion crisis that threatened the euro zone or the periphery, then the ECB would have the right to intervene.
Reacting to Stark's comments, Greek Finance Minister George Papaconstantinou repeated that his government did not need outside help because it had announced a range of steps in recent weeks to start reducing the budget deficit.
Frankly we don't need that clarification, he told Bloomberg. We don't expect to be bailed out by anybody as, I think, it is perfectly clear we're doing what needs to be done to bring the deficit down and control the public debt.
On Tuesday, a day ahead of the EU visit, the new socialist government set a more ambitious fiscal health target, saying it would cut its double-digit budget deficit under the EU's 3 percent of GDP limit by 2012, a year earlier than previously planned.
Last month, in an apparent effort to calm the debt market, senior European officials hinted strongly that the EU would help Greece if that became necessary, though they stopped short of explicitly promising aid.
What happens in one member state affects all others, especially as we have a common currency, which means we have a common responsibility, German Chancellor Angela Merkel said.
French finance minister Christine Lagarde declared the euro currency area was a monetary zone of complete solidarity.
In Wednesday's report, Stark was quoted as saying Greece had not controlled its public accounts or worked to help improve the country's competitiveness.
The Treaties envisage the non-rescue clause and the rules must be respected, he said, referring to agreements covering the euro zone.
In response, the spread of 10-year Greek government bond yields over German Bunds widened to 235 basis points from about 230 bps late on Tuesday. But it soon narrowed back to 231 bps.
Cailloux at RBS said he believed the EU would step in if confidence in the euro zone as a whole was threatened by Greece's debt problems -- although any assistance would probably come with very tough conditions attached.
For that reason, any short-term widening of Greek bond spreads from current levels would be a buying opportunity for the medium term, he said. The 10-year spread remains far below its February 2009 peak of around 300 bps.
All three major credit rating agencies downgraded Greece in December out of concern about the country's fiscal weakness. Still, Moody's Investors Service said Greece remained far from crisis and that the risks were long- rather than short-term.
Stark predicted inflation in the euro zone would remain steady until the end of 2011. Today the euro zone is characterized by a high degree of price stability which allows us to believe interest rates are appropriate, Stark said.
He said a stable inflation outlook could be affected by higher economic growth or an inability to re-absorb market liquidity quickly -- two conditions that I do not see today.
(Additional reporting by Nick Edwards; Editing by Ingrid Melander and Andrew Torchia, Ron Askew)