Greece raised the stakes on Thursday in its quest for EU help to tackle its debt crisis, warning it cannot achieve promised deficit cuts if its borrowing costs remain high and might have to call in the IMF.
Market concerns it may prove impossible to construct a euro zone financial safety net for the currency area's most heavily indebted member due to German reluctance sent the euro lower, hit Greek bank shares and raised the risk premium on Greek bonds.
Prime Minister George Papandreou told the European Parliament that draconian austerity measures announced by his socialist government showed it was committed to the stability of the euro and would carry out necessary structural reforms.
But if we keep borrowing at very high rates, and this is the challenge we have, we cannot sustain the deficit reduction that these hard measures aim to achieve, he told a committee of the EU legislature.
We should be able to borrow at rates that are normal.
The premium investors charge for holding Greek debt rather than benchmark German bonds rose to about 310 basis points, meaning Athens would have to pay well over 6 percent to borrow on capital markets, by far the highest yield in the euro zone.
Economists say such rates are unsustainable in a ye ar when Greece needs to borrow some 53 billion euros ($72.4 billion), 20 billion of it in refinancing between April 20 and end May.
Papandreou said Greece wanted a decision at an EU summit next week on a mechanism to provide financial support if needed, but stressed that Athens had not asked for money and would not default or leave the euro zone.
He said he hoped such visible EU backing would force market rates down and make it unnecessary for Greece to go to the IMF.
Britain's Daily Telegraph said on Thursday unidentified sources had suggested Greece might be able to raise cash from the IMF at an interest rate as low as 3.25 percent, at least one percentage point lower than in any EU bailout.
IMF TALK TACTICAL?
The euro extended losses against the dollar on a Dow Jones Newswires report quoting a senior Greek official as saying Athens may apply for IMF financial aid early next month because it was increasingly pessimistic about the prospect of EU help.
However, analysts said that raising the specter of the first IMF intervention in the euro zone was mostly a tactic to increase pressure for agreement on European rescue mechanism.
The IMF talk on the part of the Greek government is intended to push euro zone partners into making explicit the standby arrangement which seems to have been agreed upon at the European Council level, in the hope that such an announcement will push Greek government bond spreads to tolerable levels for Greece to proceed with borrowing, said Michael Massourakis, head of economic research at Alpha Bank in Athens.
German Chancellor Angela Merkel, facing massive public opposition to bailing out Greece ahead of a crucial regional election in May, has taken the hardest line against any rescue arrangement.
A quick act of solidarity is definitely not the right answer, she told parliament in Berlin on Wednesday, calling for radical changes to the EU treaty to make it possible to expel a serial deficit offender from the euro zone.
After initially ruling out any recourse to the International Monetary Fund inside the single currency bloc, German government sources have begun this week to say Berlin might not oppose a Greek recourse to the Washington-based global lender.
EU diplomats said this reflected both domestic political and legal pressures in Germany against a euro zone rescue for Greece and perhaps an attempt to counter Greek tactics by suggesting the IMF card is not such a nuclear option.
Some in the EU, notably in France, would see it as a major failure of political and monetary unity if a member were to go elsewhere for a bailout.
Greek bank shares fell more than 4.0 percent on Thursday, underperforming the broader Greek market on concerns that EU support may not be forthcoming.
Right now, it does not seem to be a mood of consensus within the European Union for a special type of help to Greece, Beta Securities trader Takis Zamanis said.
Investors are worried that if things go on like this, the borrowing costs will stay at high levels sand make it difficult for the government to achieve its fiscal targets.
(Additional reporting by George Georgiopoulos and Angeliki Koutantou in Athens, Timothy Heritage in Brussels and William James in London; writing by Paul Taylor; editing by John Stonestreet)