Greek PM wins political praise, no market credit

RELATED NEWS Greece says EU could intervene, mechanism in works Euro hurt by European woes; China data boosts oil

The enormity of the budget shortfall facing Greece, revealed by Papandreou after winning October elections, has shaken confidence in the euro. It has spawned talk about creating a European Monetary Fund to deal with the fiscal woes of countries using the single currency.

"On a political level, we have turned around the country's negative image," Papandreou told reporters. "Now we are taking the fight to the markets, which have reservations."

Blaming financial speculators, Papandreou said his country's bond spreads are unfair, considering a harsh 4.8 billion euro (USD 6.51 billion) fiscal austerity package passed into law last week.

The package, which includes sales tax hikes and civil servant wage cuts, aims to dispel doubts the Mediterranean nation will meet an ambitious target to narrow its budget gap to 8.7% of GDP this year, down from 12.7% in 2009.

But high borrowing costs threaten to derail the deficit plan and add to Papandreou's domestic political woes. Labour unions, which fiercely opposed the austerity measures, called a 24-hour general strike for Thursday.

Greece last week paid a hefty 6.25% coupon to borrow 5 billion euros for 10 years to prove it could still tap international markets without implicit guarantees of financial support.

European government sources say Germany and France are working on contingency plans under which state-owned financial institutions would directly purchase billions of euros in Greek bonds or offer guarantees to commercial banks that bought them.

Papandreou said on Wednesday the EU was ready to intervene to lower Greece's borrowing costs if they fail to drop in the free market. "The way to stop speculators is to make them feel that they will lose their money," Papandreou said.