Philippe Naughton and David Charter in Brussels
The leaders of France and Germany agreed today to work together to tackle the Greek debt crisis but failed to reassure jittery European financial markets.
Both the euro and Greek government bonds enjoyed a moment of respite after reports that the new EU President, Herman Van Rompuy, had brokered a bailout deal in a meeting this morning with President Sarkozy, Chancellor Angela Merkel and Jean-Claude Trichet, head of the European Central Bank.
"Euro-area member states will take determined and co-ordinated action if needed to safeguard stability in the euro area as a whole," Mr Van Rompuy told reporters in Brussels, reading from a statement agreed by all 16 eurozone states. "The Greek Government has not requested any financial support."
But as the EU's 27 leaders went into summit talks this afternoon, the lack of detail began to weigh with market traders looking for action - and hard cash - not words. The euro, which has lost about 10 per cent in value against the dollar since late 2009, initially rose slightly on Mr Van Rompuy's statement to $1.3755 before falling back $1.3688.
"It just looks like a pledge of solidarity, but no actual details of a programme, which is why the euro is still in the doldrums," said Neil Mackinnon, global macro strategist at VTB Capital. "Unless there's further news out later this afternoon, the markets will consider the EU summit response as a disappointment."
Markets see Greece at risk of defaulting on its massive borrowings because it faces several years of sluggish growth and mounting debt that even current austerity plans may not be able to stem. The even greater fear is that the crisis could prove contagious and prompt a major loss of confidence in other southern European states such as Spain and Portugal.
The crisis has exposed the vulnerability of Europe's monetary union in times of crisis. Euro members countries agree to limit their budget deficits to 3 per cent of gross domestic output because overspending can undermine their shared currency. But those deficit rules have been broken repeatedly and have not been enough to keep Greece and other countries from getting into trouble.
Various options for tackling the Greek crisis have been floated in recent days, including EU member countries guaranteeing Greece's debt, a special credit line for the Greek Government and bilateral loans.
Mrs Merkel today talked down a full financial bailout, but said that other European governments would not leave Greece in the lurch. "We won't let Greece be alone but there are rules and they have to be respected and based on that we'll issue a statement and an explanation," she said.
French government sources said that France and Germany want to offer only "political support" at this stage and that more precise plans of real help would come at a later stage.
A senior German official said that "no concrete aid measures are being considered for Greece or other countries" and that "there is no financing need at the moment" for Greece. He said that he expected Greece to come clean with details of spending cuts this year, going far beyond general promises to overhaul its public sector and reform pensions and healthcare.
Greece needs to borrow €54 billion from bond markets this year to plug its budget gap. So far it has been able to borrow from the markets but is facing increasing interest costs amid fears of a possible default.
George Papandreou, the Prime Minister, has promised to reduce Greece's deficit to 8.7 per cent of gross domestic product this year, from 12.7 per cent last year, the highest in the EU and four times above the official EU limit. But markets doubt Greece's credibility after it admitted falsifying statistics for years to make the deficit look smaller.
They also worry that the Greek Government will not be able to deliver promised cuts because it risks social unrest. Greek workers shut down schools, grounded flights and walked out of hospitals yesterday to protest against austerity measures with a much broader strike planned for February 24.
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