Leaders mull EU support tool, mkts turn on Greece

Greece's aid deal has saved it from default and quashed fears of a euro zone breakup, policymakers said on Thursday, and the head of its finance minister group said new tools were needed to help fiscal stragglers.
Investors took a less rosy view, selling the euro and driving up Greek bond yields ahead of a meeting of euro zone finance heads expected to break little new ground on the Aegean state's crisis or long-term reform of the single currency.
The difference in interest between Greek 10-year bonds and their euro zone German benchmarks jumped to 426 basis points, near record levels hit before Greece's aid parachute was announced last weekend, from 406.
The euro fell to $1.3533, its lowest level this week.
A May 9 election looming in Germany and confusion over the logistics of disbursing the aid, should Athens ask for it, has clouded the picture as Greece tries to drum up investor interest to refinance an 8.5 billion euro bond next month.
European Central Bank Executive Board member Lorenzo Bini Smaghi said the aid deal fleshed out on Sunday was a turning point in the crisis.
"This announcement makes it clear … that a scenario of default and exit from the euro area, which some market participants and observers had toyed with, was simply absurd," he told journalists in Japan.
With an estimated 30 billion euros in the first year from euro zone states and another 10-15 billion expected from the International Monetary Fund, the package would be the biggest multilateral bailout ever attempted.
LACK OF CLARITY
But hurdles remain. On Wednesday, a German economist threatened to legally challenge the aid deal because he said it broke EU rules by offering cash at below market rates.
Germany, tapped to lend some 8.4 billion euros, also cast doubt on the size of the deal, saying talk of more than the amount slated for the first year was "speculation".
It has resisted helping after Athens flouted EU rules with profligate spending and borrowing for years.
Polls show the German public is overwhelmingly against a financial bailout for Greece and Chancellor Angela Merkel could lose its majority in the Bundesrat upper house of parliament if defeated in next month's state election.
But EU Economic and Monetary Affairs Commissioner Olli Rehn said he was confident Germany would step in if needed.
"I have no reason to doubt the German commitment if needed and if aid were to be requested," Rehn said.
He also dismissed fears of some investors over Greece's long-term solvency, saying: "There will be no default."
GERMAN ROLE
Billionaire financier George Soros said the euro and the EU itself were at risk of breaking up if Germany refused to play its traditional role binding the European project together.
"The Germans have always made the concessions needed to advance the European Union, when people were looking for a deal. Not any more," Soros told Corriere della Sera in an interview published on Thursday.
"That's why the European project is stalled… If you don't make the next steps forward for the euro, the euro will go to pieces and the European Union too."
Soros said the 27-member bloc needed a more flexible mechanism like a European Monetary Fund to help countries make deficit cuts without such painful belt-tightening measures.
That was echoed by Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, who said a new measure, which could possible involve a change to the EU treaty, was needed.
"We have resorted to these loans (for Greece) because there was no other solution within the European Treaty," Juncker was quoted as saying.
"For the future we will have to install a European mechanism without allowing some member states to relax and not balance their books."
Bini Smaghi also said the crisis had exposed flaws in EU decision-making.
"This experience should now be used to create a more efficient decision-making process within the euro area, aimed in particular at preventing similar situations from occurring in the future and eventually at solving them more efficiently."
Greece may give the euro zone's 16 finance ministers an update on its situation in Madrid.
It has promised to cut its government budget deficit by about a third to 8.7 percent of gross domestic product, crucial to eventually cutting debt pile that is a quarter bigger than its annual economic output.
A euro zone source said ministers may ask Greece for more structural or administrative reforms, and reforms to its methods of gathering statistics or providing information but would not ask Athens to cut its deficit more this year.
"You can safely exclude that," the source said.