Germany Said to Consider Aid for Greece Beyond Loan Guarantees

German Finance Minister Wolfgang Schaeuble told lawmakers that options for helping Greece extend beyond loan guarantees as Greek unions struck to protest budget cuts, shutting down the nation’s schools, hospitals and flights.

European Union rules on aid are more flexible than the German government first thought, according to a lawmaker who attended today’s briefing in Berlin and spoke on the condition of anonymity because the discussions were private.

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Prospects that the EU would extend a financial lifeline to Prime Minister George Papandreou at a summit tomorrow sent Greek bonds to their biggest rally since the introduction of the euro. The euro’s slide to a nine-month low and a slump in bond prices prompted leaders to drop their resistance to rescuing Greece and to protect the rest of the euro region from market turmoil.

“Help for Greece is obviously on the way,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “The EU seems bent on making sure that it reacts in time and not at the last minute.”

An EU official said today all options are being considered, including a standing facility to provide credit guarantees. The official told reporters the measures under consideration could be national or directed by the EU. An announcement of a plan may be made today, said the official, who declined to be identified because the talks remain confidential.

Papandreou, who met French President Nicolas Sarkozy in Paris today, has failed to convince investors that his plan of spending reductions, a wage freeze and stepped-up tax collections to cut the EU’s biggest deficit will work.

Policy Reversal

For weeks, European officials insisted that no bailout was planned and that Greece’s effort to reduce its deficit, estimated at 12.7 percent of gross domestic product, should be given a chance to work. EU policy makers have no “plan B” to help Greece, former Monetary Affairs Commissioner Joaquin Almunia said in a Jan. 29 interview.

Signs of a rescue helped ease investor concerns that Greece’s worsening finances would derail the global recovery. The risk premium investors demand to buy Greek debt over comparable German bonds tumbled for a second day to 2.80 percentage points, the lowest since Jan. 19. It reached as high as 3.96 percentage points on Jan. 28.

The gains in Greek securities may be short-lived.

There will be “blood on the walls” in credit markets if the EU fails to agree to a package for Greece tomorrow, Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London, said in a note to investors. “They must be aware of that and thus it is an extremely unlikely scenario,” he said.

Summit Agenda

Leaders arrive in Brussels tomorrow morning for the summit, which will be hosted by EU President Herman Van Rompuy. While Greece isn’t officially on the agenda, he will discuss the current “economic situation” over lunch, a session traditionally devoted to the most-sensitive subjects.

Schaeuble told reporters today he had “no intention to participate in speculation.” He gives a speech on tax policy and financial markets in Berlin at 5:40 p.m. local time. German Chancellor Angela Merkel is not scheduled to make any public comments today.

“We are considering support,” Michael Meister, financial- affairs spokesman for Merkel’s Christian Democratic Union, said yesterday.

“We are talking about support in the broad sense,” Olli Rehn, the EU’s economic affairs commissioner, said yesterday. Meister said aid would come “under strict conditions and if the Greek government undertakes far-reaching state reforms.”

‘Busy Working’

The French government is “busy working” on possible solutions for Greece and Sarkozy plans to hold a joint press conference with Merkel after the summit, spokesman Luc Chatel said in Paris today.

Merkel, facing rising unemployment and declining support for her three-party coalition, may face domestic criticism over an attempt to help Greece.

“We don’t help the alcoholic by giving him another bottle of schnapps,” Frank Schaeffler, deputy finance spokesman for Merkel’s Free Democratic Party allies, said in a speech to lawmakers in Berlin today.

The EU would be wiser to call on the International Monetary Fund rather that set the precedent of bailing out its weakest members, former Bank of England policy maker Charles Goodhart said in an interview today in Sydney.

“Although the amount of money required to rescue the Greek fiscal position is relatively minor, the problem is it would be a precedent,” Goodhart said. “I would ask the IMF to come in. From the European point of view, it’s the least bad option.”

German government spokesman Ulrich Wilhelm said in a statement yesterday that reports a decision to offer Greek assistance had “virtually been taken” were “unfounded.”

EU Rules

EU law bars the European Central Bank or national central banks from bailing out EU countries through buying their debt or offering loans, according to a report by the German parliament’s research unit published today.

Options for Greece include bilateral aid or a package put together by a group of countries using the euro, Meister said.

Nobel laureate Joseph Stiglitz said Greece’s budget-deficit reduction plan will prevent a default, and he reiterated his call for the EU to aid the nation against “speculative attacks” in financial markets.

“I’ve been very impressed with the comprehensive approach they’ve had,” Stiglitz said in an interview on Bloomberg Television in London yesterday. “There’s clearly no risk of default. I’m very confident about it.”

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