Germany said it could offer aid for Greece within days if it agreed to painful new austerity measures, but rescue jitters pushed the cost of insuring against a Greek debt default to a record high.
Chancellor Angela Merkel said Germany, which has taken a hard line on support for Greece, stood ready to commit funds to defend the euro if Athens showed a readiness to enact new savings and put its economy back on a sustainable path.
Greece's borrowing costs rose Monday to a 12-year peak on investors' fears that assistance would come too late to avert the euro zone's first sovereign debt default.
Marco Annunziata, chief economist at UniCredit MIB said: "It is extraordinary that a euro zone member country finds itself a mere three weeks away from a potential default, with a clear possibility that uncertainty will only be resolved at the last minute."
Concern over sovereign credit risk also dragged down the euro and Greek bank stocks and pushed the cost of insuring Portugal's debt to new highs, underlining concerns that it could be the next euro zone state to suffer a debt crisis.
Merkel, who faces public resistance to providing aid for Greece but wants to reassure the markets, said Greece must commit to further savings measures but also made clear Berlin was near a decision on granting aid.
"We need a positive development in Greece together with further savings measures," she told reporters in Berlin. "Germany will help if the appropriate conditions are met. That will take a few more days."
The backing of Germany, Europe's biggest economy, is vital for any aid package but Merkel fears her party could lose a regional election on May 9, depriving her coalition government of its majority in the lower house of parliament.
German Finance Minister Wolfgang Schaeuble said Berlin aimed to free up financial support for Greece before May 19, when Athens has to refinance an 8.5 billion euro bond.
Saddled with huge debt and a swollen deficit, Greece bowed to pressure from markets on Friday and formally requested aid, triggering what could be the first financial rescue of a member of the 11-year-old single currency bloc.
Athens is now in talks with the European Union and International Monetary Fund on additional steps to get the aid flowing in time to meet the May 19 debt deadline.
Finance Minister George Papaconstantinou said Athens would announce new policy measures after talks end with the EU and IMF on their planned 45 billion euro ($60.49 billion) aid package.
He tried to quell fears among many Greeks that the IMF could impose draconian fiscal measures, saying the Fund, the EU and European Central Bank were taking a common approach.
"There is a crucial date for Greece and it is May 19, the day when it must repay a maturing bond of about 9 billion euros. Until then our borrowing needs are covered but conditions in markets today are totally prohibitive," Papaconstantinou said.
Investors are worried Greece could be the first euro zone country to default. "The market wants to see the cash laying on the table, not in a coffer beside the table," said David Schnautz, strategist at Commerzbank in Frankfurt.
Underlining the fears of contagion to other heavily indebted members of the euro zone, and also concerns about the damage the crisis could do to the EU's standing, France and the European Union executive called for rapid action to help Greece.
President Nicolas Sarkozy and European Commission President Jose Manuel Barroso said after talks in Paris that it was important to "counter speculation against Greece in order to ensure the stability of the euro zone."
French Economy Minister Christine Lagarde underlined calls for Germany to decide quickly, saying in the United States that time was "of the essence" in setting the final terms for Greece.
Portuguese Foreign Minister Luis Amado, speaking in Luxembourg, urged action at European level in what he said was "... really a fight between the markets and the euro zone and we need to deal politically with the situation."
Athens has already announced billions of euros in budget cuts, including tax increases and reductions in public sector wages, setting off violent protests and strikes. Greek media said EU and IMF officials had proposed more than a dozen steps to cut public sector costs and boost competitiveness.
The first such measure — allowing non-Greek cruise ships to moor at multiple Greek ports without hiring Greek crews — prompted a 24-hour strike by dockers on Monday.
On the markets, five-year Greek credit default swaps were last at 702.8 basis points, having hit a session high of 713 basis points, according to CMA Datavision. The price means it costs 702,800 euros to ensure 10 million euros worth of debt against default.
The Greek/German 10-year bond yield spread climbed at one point to 680 basis points, up from Friday's settlement close of 588 bps, matching levels last seen in February 1998 — before Greece adopted the euro in 2001. (One basis point is equivalent to 0.01%, or one-hundredth of a percentage point.)
Spreads against Bunds widened across the euro zone periphery, with the Italian spread moving to 99 bps, its widest since July 2009.
"The Greek crisis has started to spread to the rest of the periphery and Portugal seems to be next in line," said Darren Williams, senior economist at Alliance Bernstein.
Canadian Finance Minister Jim Flaherty has said the package could end up being "more than had been said previously."
"An EU-IMF support package of 45 billion euros would only fill liquidity needs of the first year," Barclays Capital said.
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