Is a Rescue at Hand for Greece?

GOOD MORNING. Stocks in Asia closed mixed today; U.S. futures are pointing to a higher open.

Greece may be a small country but it has the largest budget deficit in the European Union, and fears that it might default on its debt have roiled global markets. But is a rescue finally at hand? European stocks briefly drifted higher today on speculation that European Central Bank President Jean-Claude Trichet was jetting back to Europe earlier than expected to announce a deal. A central bank spokesman said Trichet only came back earlier because of travel logistics to attend a planned EU summit meeting. But pressure is mounting on him and other financial leaders in Europe to do something about Greece’s crisis, and analysts say a bailout package could still be in the works.

Greece’s fiscal woes, along with those of Spain and Portugal, have battered European markets, shaken confidence in the region’s political leadership and sent the euro skidding over 4% against the dollar and 7% against the yen this year. Trichet had been urging Greece to come up with a domestic package of spending cuts and other measures to solve its fiscal crisis and his comments in January had indicated he wouldn’t support an external bailout, saying that “no government, no state can expect any special treatment” from the European central bank. Trichet softened his tone in early February, though, saying he’s “confident” Greece will do what’s necessary. But with European markets and the euro plunging, he may be forced to relent.

Even if Trichet changes his tune, though, a bailout is no sure thing. Europe’s Maastricht Treaty, which set the criteria for the euro’s monetary policy, includes a no-bailout clause for countries in fiscal crisis. European leaders aren’t keen on breaking the treaty, arguing it would set a bad precedent. Politicians may not be able to sell a bailout at home either. Indeed, with the largest economy in Europe, Germany would likely shoulder the brunt of the costs, and German Finance Minister Wolfgang Schaeuble told reporters last week that "Greece has to realize that when you break the rules over a long period of time, you have to pay a high price," suggesting that a bailout would be a tough sell in Berlin. As for Greece, it’s still arguing that it can go it alone. “The worst possible signal which we could send out is one calling for outside help,” Greek Finance Minister George Papaconstantinou said in an interview yesterday.

Still, without a bailout, stocks could continue to lose ground, reversing their gains over the last year and forcing political leaders to act. “It has reached a stage where the markets clearly do not have any faith in the ability of Greece to solve its own problems,” says Stephen Pope, chief global equity strategist for Cantor Fitzgerald in London. European bureaucrats don’t want the IMF involved, he notes, and he expects that eventually the “organs” of the European Union/Euro Zone will have to step up.

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