Fun, Fun, Fun, in the good old EU

By Renee Maltezou

ATHENS (Reuters) - Financial markets gave heavily indebted Greece a breather on Wednesday on growing expectations of a European Union rescue as civil servants staged the first major strike against Athens' crisis-driven austerity measures.

The premium investors charge to buy Greek government debt rather than benchmark German bonds tumbled to its lowest in three weeks and Greek bank shares rose more than 5 percent on news that euro zone countries were working on financial support.

Market pressure on Portuguese, Spanish and Irish bonds also abated after the strongest signal so far that Germany, Europe's biggest economy, may be willing to help Greece. But talk of a possible rescue hit safe haven German debt.

A senior source in Berlin's ruling coalition told Reuters on Tuesday that euro zone governments had agreed in principle to aid Athens, although the method had still to be worked out.

It would be the first such rescue in the European single currency's 11-year lifetime.

But as Greek Prime Minister George Papandreou headed to France to seek backing from the second biggest euro zone economy for his drive to slash a huge budget deficit, a French source said there was no agreement yet within the euro zone on aid for Greece.

In Athens, striking civil servants grounded flights and shut many schools and offices in a foretaste of the resistance the Socialist government faces to a wage freeze, pay cuts for higher public sector earners, tax rises and a later retirement age.

Investors, rating agencies and EU policymakers were closely watching the 24-hour strike and the government's response.

They have said Greece, which is prone to violent street protests, will not get support for free and urged the government to be firm.

Private and public sector unions plan another show of strength with a general strike on February 24.

EU STATEMENT SEEN

EU leaders meeting in Brussels on Thursday with European Central Bank president Jean-Claude Trichet may well issue a statement on Greece's financial crisis, an EU source said.

"I would not be surprised if a communication on this subject is issued," said the source, who is close to preparations for the informal economic summit.

Asked whether the leaders would discuss scenarios for helping Greece, the source said: "I don't exclude anything."

Any financial assistance to Athens would likely be tied to strict conditions, but the nature and scale of a rescue remained unclear, partly because a treaty prohibition on EU bail-outs for euro zone members complicates the task.

Germany and France would probably bear the lion's share of any assistance, since Italy and Spain, the other two big economies in the zone, are themselves under financial pressure.

Britain, which opted out of the euro, has made clear that Greece is the euro zone's responsibility.

The Wall Street Journal said Germany was considering taking a lead role with other EU partners in offering Greece and other highly indebted euro zone countries loan guarantees in an effort to calm market fears of a default.

The newspaper said German Finance Minister Wolfgang Schaeuble had discussed the idea in recent days with Trichet.

Brussels think-tanks have said a package of bilateral loans to Greece by the main euro zone states tied to fiscal benchmarks to be monitored by the European Commission would be the most straightforward solution.

German leaders have hitherto rejected any talk of a bail-out, saying Athens must do its own homework and warning of a precedent that would create moral hazard, rewarding fiscally profligate countries.

EU officials have been particularly unsympathetic to Greece since it admitted in October that its statistics were fraudulent and the 2009 budget deficit would be 12.7 percent of gross domestic product, more than twice the announced level.

(Additional reporting by Madeline Chambers in Berlin, Marcin Grajewski in Brussels and Emmanuel Jarry in Paris; writing by Paul Taylor, editing by Mike Peacock)