Sarkozy Says Euro Zone Ready to Help Greece If Needed (Update2)

By Jonathan Stearns and Maria Petrakis
March 8 (Bloomberg) -- French President Nicolas Sarkozy said the euro region is ready to rescue Greece should the government struggle to fund its budget deficit, arguing that the country is "under attack" from so-called speculators.
"I want to be very clear: if it were necessary, the states of the euro zone would fulfill their commitments," Sarkozy said in Paris yesterday after a meeting with Greek Prime Minister George Papandreou. "There can be no doubt in this regard."
While Greece doesn’t need assistance now, "we have measures, we are ready, we are determined," he said.
The euro strengthened, Asian stocks rose and U.S. and European stock-index futures climbed. Sarkozy’s comments were among the strongest by an EU leader to signal the bloc would bail out Greece as they try to warn investors against betting on declines in the euro and Greek bonds. Papandreou’s government last week passed further austerity measures and sold 5 billion euros ($6.8 billion) of debt.
"Speculators and the markets should know that solidarity means something and that, if there’s a problem, we are there,"
said Sarkozy. "The sooner we say that and the more firmly we say that, the more rapidly we settle the problem."
The euro gained 0.5 percent to $1.3696 at 8:50 a.m. in Paris, paring its losses over the past three months to 7 percent. The MSCI Asia Pacific Index advanced 1.9 percent to a six-week high.

Yield Spread

The spread between the yield on Greek 10-year bonds and their German counterparts fell to the lowest in three weeks on March 3. Papandreou, who meets President Barack Obama in Washington tomorrow, said he wants a "normalization" in Greek market interest rates after the deficit-cutting steps.
Greece faces more than 20 billion euros in debt redemptions in April and May.
Sarkozy wouldn’t say what steps the EU would take and German Chancellor Angela Merkel, who runs Europe’s largest economy, has so far refused to give the green light to any aid package. Merkel said after meeting Papandreou on March 5 that the question of a bailout "‘absolutely doesn’t arise." Her coalition partner, Guido Westerwelle, said he won’t sign a "blank check" for Greece.
"Nobody can doubt how reluctant the Germans are, and I am starting to think that if official money is needed in May, then there may first be a major discussion between the Germans and the French how to do this," said Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London, in an e-mailed note. "It really comes down to some very fundamental issues of how the euro-zone will function going forward."

European Monetary Fund

Holger Schmieding, chief European economist at Bank of America-Merrill Lynch in London, said European leaders may be enacting "some bad cop, good cop routine, with Merkel praising the Greek fiscal adjustment less enthusiastically than Sarkozy." Neither leader is departing from a Feb. 11 EU summit agreement to help Greece if needed, Schmieding said in a note.
German Finance Minister Wolfgang Schaeuble indicated his government is already thinking about how another Greek crisis can be avoided, saying the euro region should consider creating an institution similar to the International Monetary Fund.
"We shouldn’t rule anything out, including the creation of a European Monetary Fund," he said in an interview with the Welt am Sonntag newspaper published yesterday.
The comments come after proposals for a European Monetary Fund were put forward last month by Deutsche Bank AG Chief Economist Thomas Mayer and Daniel Gros, director of the Centre for European Policy Studies in Brussels.

Fund Tasks

The EMF could ease the disruption caused by the failure of a euro member to pay its bills by offering investors new EMF bonds in exchange for the defaulted securities, they said.
Investors would be required to take a "haircut."
"Setting up a European Monetary Fund is superior to the option of either calling in the IMF or muddling through on the basis of ad hoc interventions," Mayer and Gros wrote in an article in the Economist last month.
International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview yesterday it’s "perfectly reasonable for Europeans to try to build an institution they need." He also said a monetary fund that intervenes in euros would stand in contrast to the IMF, whose aid packages come in a currency that’s different than the borrower’s currency.
Flaws in the euro region’s governance were also indentified by former Federal Reserve Chairman Paul Volcker, who said in an interview on March 6 that the lack of a political union to back up the European Central Bank is a "structural crack."
"Maybe fortunately it’s tested with a country as small as Greece, which doesn’t present an insuperable financing problem," he said.