European governments hinted at giving Greece extra time to meet budget-cut targets, as long as the financially stricken country's feuding politicians put together a ruling coalition committed to austerity.

Calling talk of a Greek pullout from the euro “nonsense” and “propaganda,” Luxembourg Prime Minister Jean-Claude Juncker said only a “fully functioning” Greek government would be entitled to tinker with the conditions attached to 240 billion euros ($308 billion) of rescue aid.

“The government would have to stand by the program,” Juncker told reporters after chairing a meeting of euro-area finance ministers in Brussels late yesterday. “If there are dramatic changes in circumstances, we wouldn't close ourselves off to a debate over extending the deadlines.”

Greece's post-election impasse multiplied the signs of stress in European markets yesterday. The euro fell for the 10th time in 11 days and stocks surrendered a two-day gain. Bond yields in recession-wracked Spain, the next potential candidate for financial support, touched a five-month high.

“The euro breakup story is gathering steam again,” Marchel Alexandrovich, a senior European economist at Jefferies International in London, said in a research note. “If Greece were to ever exit the euro, no amount of reassuring comments will convince investors that other countries won't soon follow.”

Greek President Karolos Papoulias will call party leaders together today, the ninth day of post-election maneuvering, to make the case for a government of prominent non-politicians. The head of the biggest anti-bailout party, Alexis Tsipras, will attend after boycotting yesterday's bargaining sessions, state-run NET TV reported.

“Solidarity is a two-way street,” European Union Economic and Monetary Commissioner Olli Rehn said. “We expect that the commitments are respected and the fiscal targets are a core part of the commitments.”

Greece's caretaker government will also announce whether it will repay 436 million euros due today on a note held by investors who shunned its bond-loss accord. Paying the holdouts in full would anger investors who took losses in this year's debt restructuring, while withholding payment could be construed as default.

'Big Problems'

Investors pummeled Greek stocks, pushing the ASE Index down 4.6 percent to 584.04 yesterday, the lowest since November 1992. The drop extended last week's 11 percent plunge.

“Greece needs to elect a pro-reform and pro-austerity parliament or I foresee big problems,” Dutch Finance Minister Jan Kees de Jager said. “There is no room to weaken the agreements by reforming less or reducing spending cuts.”

Questions for European policymakers include whether to ease the conditions linked to Greece's financial infusions in order to keep it in the euro or, if that fails, how to contain the damage of what would be an unprecedented exit.

No answers emerged last night. As in early 2010 when the first Greek bailout and broader rescue fund were improvised, the way forward will be charted by top political leaders. Their next summit is May 23 in Brussels, the 18th since the debt crisis exploded.

German Chancellor Angela Merkel, the dominant figure in two years of crisis containment, said Greece will “always” be part of the European Union, a 27-nation bloc with a common market, business regulations and trade policy. Speaking to a school group in Berlin yesterday, she didn't offer the same assurance about Greece holding on to the euro, saying only that “it's better for the Greeks to stay in the euro area.”

The once-taboo issue of a Greek departure or expulsion from the 17-nation currency union burst into the public debate last week, when European Central Bank officials including Patrick Honohan of Ireland aired the pros and cons.

Greece's predicament magnified doubts about the health of Spain, the only euro country to remain mired in recession through 2013, according to European Commission forecasts published last week.

Ten-year Spanish yields rose as high as 6.36 percent before settling at 6.23 percent yesterday, compared with 6.01 percent at the end of last week. The extra yield over benchmark German levels widened to 477 basis points. Spain's woes helped drag up Italian 10-year yields to 5.71 percent from 5.51 percent.

President Hollande

The euro ministers saluted Spain's newfound resolve to clean up its banking system and agreed that “speed is of the essence” in completing that process, Juncker said.

Another political turning point comes today, when Francois Hollande is sworn in as French president in the first power shift to the Socialists in the second biggest euro economy since 1981.

Hollande's bid to inject a pro-growth element into the austerity-dominated approach to the crisis got a boost on May 13 when Merkel's party was drubbed in elections in Germany's largest, most industrial state, North Rhine-Westphalia.

The regional vote maintained the rival Social Democrats' hold on the upper house of the German parliament and gave them leverage to prod Merkel into concessions before ratifying a euro deficit-limitation treaty, one of her hallmark crisis-fighting initiatives.

Hollande campaigned against that treaty as well, pledging to flank it with pro-growth measures at a time of 10.9 percent unemployment across the euro zone, the highest since the currency's debut in 1999.

Merkel, set to host Hollande in Berlin today hours after his inauguration, said she won't alter her approach to the crisis in the wake of her party's “bitter, painful defeat.”

Also held up until France's new government takes office are appointments to a vacancy on the ECB's Executive Board, of a successor to Juncker as chairman of euro finance meetings and of the manager of the European Stability Mechanism, the future permanent rescue fund.

Juncker opened the nomination process for the ESM post yesterday. He doubted a new euro finance chairman would be named before the end of June.

Bloomberg News

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Europe May Cut Greece Some Slack

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