Trichet return fuels talk of EU action on Greece

But European policymakers kept the pressure up on Athens to solve its own problems.

News that European Central Bank President Jean-Claude Trichet was cutting short a trip to Australia to attend the special EU meeting on Thursday boosted sentiment after days in which currency, bond and stock markets were dominated by concerns about highly-indebted members of the currency union.

Trichet had been expected to stay in Australia through Wednesday. A spokesman for the ECB played down the significance of the change in travel plans, saying Trichet had only moved up his return flight to ensure he did not miss a connection.

But the news fueled speculation that EU action to help Greece resolve its debt woes may be forthcoming.

Fiscally fragile countries like Greece, Portugal and Spain are under intense pressure to rein in their stretched budgets, which have hit investor confidence in the 11-year old euro zone.

Failure to do so would push up their borrowing costs in a vicious circle economists say could force the bloc to bail out one of its members or even prompt a country to be expelled from the euro zone.

It seems like a slow indefatigable march toward (the market) forcing European policymakers to come up with some sort of concrete support package but whether that happens this week remains to be seen, said Richard McGuire, rate strategist at RBC Capital Markets.

Tensions within the currency bloc, triggered by Greek fiscal woes and growing concerns over Portugal and Spain, are not yet on the formal agenda for Thursday's summit but will be added or discussed intensively on the sidelines, according to officials.

An EU diplomat said the summit might yield a statement in support of Greece but was unlikely to mention aid and would broadly stick to what the European Commission and the ECB have already said.

A Reuters poll of economists on Tuesday found them giving only a one in four chance that Greece may have to seek a bailout this year to put its finances back on track.

PRESSURE

EU policymakers continued to apply pressure to Athens to deliver on its deficit-cutting plan.

It has vowed to cut the budget deficit, which spiraled to 12.7 percent of gross domestic product (GDP) last year, below the EU's 3 percent ceiling by 2012.

French Economy Minister Christine Lagarde said she was confident Greece would deliver on its fiscal programme, adding that EU partners were watching the situation carefully.

Lagarde did not answer a question on whether Europe was working on an aid package for Greece or whether its financial woes would be discussed at the summit.

We have total confidence that Greece will carry out this programme as it should, she told a news conference.

ECB Governing Council member Ewald Nowotny said the central bank could not help Greece due to its no-bailout clause and any help from countries would be a political decision.

The ECB have a clear mandate ... we have a clear no-bailout clause, Nowotny was quoted as saying in an interview with FT Alphaville, a blog published by the Financial Times newspaper.

Fellow Governing Council member Erkki Liikanen told Finnish broadcaster YLE: We wait and trust that Greece will carry out those actions it announced last week.

As part of an austerity programme designed to bring its deficit under control and restore investor confidence, Greece unveiled plans on Tuesday to overhaul its near-bankrupt pension system by raising the pension age and banning early retirement.

Our first duty in these conditions is to save the economy, to reduce debt while seeking the most just solutions that protect as much as possible those on lower incomes and the middle-class, Greek Prime Minister George Papandreou said during a cabinet meeting to discuss tax and wage reforms.

He is due to announce details of tax and wage reforms later this week. Unions have threatened to intensify strikes if the Socialists stand firm on their plans to freeze public sector wages and hike taxes.

The threat of social unrest in Greece, Spain and Portugal has fueled concern that governments may struggle to push through their austerity plans.

Stock markets in Greece, Portugal and Spain were all in positive territory on Tuesday after days of losses and the premiums investors demand to hold their debt compared to benchmark German issues narrowed.

The euro, which fell below $1.36 to a near 9-month low against the dollar on Friday, rose to just under $1.38.

Europe's single currency has fallen more than 6 percent since mid-December when ratings agencies first downgraded Greece.

(Writing by Noah Barkin)