KOLKATA: Finance Minister Pranab Mukherjee today said the steep fall in the rupee was a matter of great concern and the Centre was trying to resolve the situation.

"It is a matter of great concern. We are watching the situation. The Centre is not (sitting) idle. We are trying to resolve (the issue)," Mukherjee said.

"This is due to the Eurozone crisis," he said. Mukherjee added, "There is also currency crisis in emerging markets including Brazil."

At the forex market, the domestic currency has been falling against the US dollar over the past few days.

On Friday, in early trade, the rupee threatened to breach the 55-level as it slumped to 54.91 against the American currency - the fresh all-time low it hit in the third straight session as copious fund outflows continued amid Eurozone worries.

Dealers said strong dollar demand from importers, mainly oil refiners, on expectation of further strengthening of the dollar, caused the rupee's fall.

However, the Reserve Bank had stepped in and stemmed the rupee's slide.

Falling rupee and high inflation would make it difficult for India to achieve 7.5 per cent economic growth during the current financial year, Planning Commission Deputy Chairman Montek Singh Ahluwalia has said.

"The Finance Ministry has said they are hoping for a 7.5 per cent growth this year. That is going to be tough but not impossible," Ahluwalia told PTI here.

He said while the last quarter did not show robustness, it remains to be seen how growth in the first quarter of the current fiscal will fare.

"It is going to be a slow transition," he said, adding that in India "we need to get out of a what looks like a decelerating growth phase .. And move to the growth path."

Economic worries over the past few months like rupee depreciation, high inflation and current account deficit are not helping India, which has been trying to get back on the pre-global crisis growth rates of 8-9 per cent.

The rupee has depreciated by 11 per cent against dollar since March. At the same time, inflation in April rose to 7.23 per cent against 6.89 per cent a month ago.

The global financial crisis of 2008 had pulled down India's growth rate to 6.7 per cent in 2008-09. India has projected a growth rate of 7.6 per cent in 2012-13, up from 6.9 per cent recorded in the previous fiscal.

On whether the government would be willing to take tough decisions to put its economy on the path of high growth, Ahluwalia said, "I would certainly hope so. Certainly all the advice that we would be giving (to the government) is that India has tremendous opportunity to look good and to attract investment in a world which is very uncertain and we should not miss that opportunity."

He underlined need for restoration of fiscal credibility, action on the underprised petroleum products and taking care of implementation bottlenecks in infrastructure projects as being measures that should be very high on the government's agenda.

"Even if a little block is removed, it will create a revival of confidence that the country is on the right track," he added.

Ahluwalia said the view in the Planning Commission on fuel subsidies is very clear that "fuel prices just have to be adjusted.

"It is obvious from a technical and economic point of view, the case is absolutely overwhelming. In practice, political realities also have to be taken into account and governments very often have to decide when they want to do it. There is absolutely no doubt in my mind we just have to raise fuel prices," he said.

Ahluwalia said people must be educated on the importance of raising fuel prices.

In the case of petroleum, 80 per cent of the fuel is imported "so not to charge for the price which you are being made to pay is basically bankrupting the petroleum sector. Either that or the budget has to bear a huge burden of subsidy and neither of those is sensible."

On concerns over India's high current account deficit, Ahluwalia said the size of the CAD is higher than what India is normally comfortable with.

"A three per cent is a little on higher side and I will be a lot more comfortable with two and a half per cent. But if for a couple of years, you have to do three per cent mainly because oil prices until very recently were fairly high.

"I do not think that is a disastrous situation provided you can attract FDI and long-term capital flows," he said.

"The trouble is when you have a lot of global uncertainty, all these things become uncertain. So, you get pressure on the rupee," he added.

Ahluwalia noted that uncertainties in Europe have resulted in a very volatile international situation, one that has not been seen before and in which developing countries are being hit in different ways.

"The rupee has appreciated at certain times, this time it has depreciated," he said on the depreciation of the Indian currency which touched all time low of over 54 against dollar last week.

Noting that India does not follow a policy that anchors the rupee, Ahluwalia said the whole assumption is that market forces will be allowed to work, but the government will step in when it thinks the exchange rate has overshot.

He said the RBI, which has a lot of "ammunition" that it can use, has so far done the "right thing" in the way it has managed the currency fluctuation.

"I would hope that the rupee would not see any large depreciations or jumps. I would not particularly say that I am keen for it to appreciate either. Let the market push it one way or the other and as long as those movements are small I do not think there is too much to worry about."

Ahluwalia also stressed that inflation should be kept under tighter control.

"Inflation at seven per cent is too high. Ideally, we would want inflation to be stabilised round 5-6 per cent, so I think we need to bring inflation down a little more. What is going to do that to a large extent also depends on the supply side. It is not just a demand side factor," he added.

He stressed that the real issue is a "quick return" to certainty in the financial markets in general, particularly in the context of Europe.

The "real danger" in the European case is not a slow growth, but since the financial uncertainties are not being properly managed, there is real risk of "financial disruption" which could have a spill over effects internationally.

Despite another strike by pilots, the government is defiant. Recommendations to harmonise the wages of different sections of staff are also ready. This might be the last chance to save Air India
Jitendra Avhad, the leader of AWOL Air India pilots, appears to be a man who chooses his words carefully.

Members of the Indian Pilots' Guild, who have called in sick since May 8, are not on strike but agitating, the Maharashtra legislator has told reporters and in television interviews. Agitate could mean making (someone) troubled or nervous. Agitate could also refer to a campaign to arouse public concern about an issue in the hope of prompting action.

If Avhad & Co's intention was to trouble the government, it has not worked. Far from troubled, the government is actually defiant. Civil aviation minister Ajit Singh has said the government was giving the national airline, which has been surviving on taxpayers' money, one last chance to perform to qualify for a 30,000-crore bailout.

That brings us to the campaign part. Assuming arousing public concern and prompting action are the reasons the pilots are striking, well, agitating , the public and the government will have to overlook a few things.

Pampered Lot?

First would be Singh's statement on Wednesday that the management is investigating cases of theft, fraud and abuse of perks in Air India.

Second would be the validity of the IPG demand that its counterparts from the Indian Commercial Pilots' Association be barred from training in the 787 Boeing Dreamliners the carrier is buying. IPG members belong to the erstwhile Air India and ICPA represents the Indian Airlines pilots before the two airlines were merged in 2007. The IPG is harking back to an agreement in 2006 that said the first 12 Dreamliners be manned by Air India pilots in order of seniority. The merger obviously matters little to IPG.

Third would be the salaries of pilots. The Air India agitation is not a struggle by lowly paid employees demanding better wages and fighting inhuman work conditions. Air India commanders (pilots with eight years of experience who are responsible for operation and safety during flights) receive around 8-10 lakh a month (see Different Pay Scales). That makes them among the highest-paid pilots in the world, according to Ravinder H Dholakia , a member of the Justice DM Dharmadhikari Committee, appointed by the government to resolve HR issues between employees of the two airlines.

Say, if these pilots fail to become commanders by a quirk of fate or by virtue of being bad pilots, they will be compensated 'notionally' with the same pay and allowances as commanders, according to a government official . Due to these reasons, the fight for unpaid salaries - the only demand of the pilots that makes the 'genuine' list - threatens to be unheard.

Rohit Nandan, chairman and managing director of Air India, says there is no justification for the strike especially when the Dharmadhikari Committee report is with the government, which has said it will soon implement its recommendations.

Experts and independent observers have criticised the strike for the same reason. Dholakia says the strike is untimely and premature. "The pilots should have waited for the implementation of the report."
Saikat Chaudhuri, assistant professor of management at the Wharton School, University of Pennsylvania, says the strike is most unfortunate because things were beginning to look up for the airline. He says last month, a debt restructuring plan (Air India has a total debt of around 44,000 crore) was pushed through and the bailout package approved, but more importantly, the carrier's year-on-year revenue and load factor (measure of occupancy) performance had markedly improved. "The Dreamliners are also finally poised to join the fleet, which will help reduce operational costs and optimise capacity on routes. And finally, Air India could have benefited even more from Kingfisher's [Airlines] current woes."

Good Work Undone

At Air India's Delhi office, Nandan affects a look that says as much. "The strike is a huge setback to all my efforts to revive the airline," he says. More than the monetary losses (see At a Loss), he says it's the further loss of confidence among consumers and time to recover market share that worries him.

Already, Air India's market share has fallen to 17.6% in April, according to government data. Only GoAir and Kingfisher Airlines have a smaller market share. Air India also had the highest flight cancellations among all Indian airlines, which will rise after this month's strike. Thanks to the strike, the attention has shifted from the airline's other vexing problems such as accumulated losses of around 20,000 crore and its less-than satisfactory operations to the genesis of the strike - the merger of Air India and Indian Airlines to form National Aviation Co of India Ltd, which was eventually renamed Air India Ltd. Nandan supports the merger, however . "In 2007, it appeared logical to come together ." Fuel was being bought separately and tickets for the same destinations were sold at different counters, according to him. The potential for benefits , from bulk discounts to an end to customer confusion to insurance savings, was huge, he says.

Chaudhuri, who studies and teaches mergers, acquisitions and innovation management, backs this argument. A well-implemented merger would catalyse growth efforts as well as provide revenue and cost synergies, he wrote in The Economic Times in 2007. "These include the ability to optimise networks and reduce overcapacity, expand geographic coverage, capitalise on economies of scale and scope in fleet utilisation and ground facilities , remove duplications in back-end operations , and increase bargaining power in purchasing activities as well as airport slot negotiation."

Indeed, there are many who see the bright side of a marriage between airlines for these very factors. When US-based United Airlines and Continental announced a merger in late 2010, it was estimated that the carriers together would generate up to $1.2 billion in net annual synergies and around $300 million in cost savings by 2013. In Air India's case, the merger, advised by consulting company Accenture's Indian offshoot, was expected to result in savings up to 1,200 crore from 2010. It is another matter that the carrier is neck deep in debt and losses. Accenture declined to comment for this story.
If the merger hasn't spawned the promised benefits , it is only because it has long remained on paper , according to Air India officials and experts.

The success of the deal will hinge on the effectiveness of the integration of the organisations, Chaudhuri wrote in 2007. "... the integration promises to be particularly complex... the areas that require particular attention and care are the fusion of different sets of capabilities and disparate cultures, rooted in functional processes as well as people."

Half-Baked Merger

Chaudhuri could not have been more prescient. The merger was due to be completed by 2009, but remained half-baked even in early 2010. A galling example was the poor backend reservation system on the airline's website.
Today, a large part of the technical, operation and IT integration is complete , according to Nandan. The notable exception happens to be HR.

HR issues remain unresolved five years after melding the two airlines. Pilots and other employees of the former Air India and Indian Airlines function separately. They have different wage structures, training schedules, working hours, career progression and leaves.

This disparity has caused great heartburn among employees - the pilot strike is a telling example of their animosity. Craig Jenks, President of Airline/Aircraft Projects Inc, a New York-based air transport consultancy, says pilots are acting as if they are each other's mortal enemy.

Nandan says much work on HR integration was done until 2009, including division of responsibilities among personnel. But between 2009 and 2011, the entire process came to a standstill, according to him. "It was probably because no one wanted to rock the boat."

The result was that the differences in culture, facilities and pay remained. Nandan says the strike is an expression of all the prejudices against the merger.

Previous attempts to rationalise wages were resisted, according to a study commissioned by the government that was reviewed by ET on Sunday (Burning 57 crore a Day, May 8, 2011) because salaries in a "large number of categories are over and above the market structure" . The aviation ministry appointed the Dharmadhikari panel in February 2011 soon after the study.

But the committee came in too late, according to Nandan. "No doubt, there was soft-pedalling on the issue," he says.

Jenks says what is going on in India right now is not completely without analogy elsewhere - airline mergers have always been difficult though there are also smooth mergers such as Delta's acquisition of Northwest in the US and British Airways' acquisition of BMI in the UK. "It is also true that integration of pilot 'seniority' lists is often the single most difficult thing in an airline merger," he says.

But a merger where pilot issues are sabotaging operations five years on has not happened elsewhere, he says. "What you have here is a monopoly, 'franchise' way of making demands , by staff at two ex-monopolies ."

What is surprising to an outsider, says Jenks, is the determination of key parties to ignore the global way of operations . "This is as if Emirates, Qatar Airlines, and Singapore Airlines did not exist. Not to speak of Indian low-cost carriers. Their actions lack a concept of a competitive environment."

Nandan agrees that the pre-merger monopoly mindset exists within Air India, but says after many years of co-existence of two companies, this was inevitable. "They were leaders. That attitude is being threatened from within and outside." Air India has to live with a changing market place, he says. "One cannot wish away competition."

A Nightmare called Dreamliner

To complicate matters for Air India, the impending arrival of Dreamliners has set off a new tug of war between pilots. A new aircraft type is often seen as the highlight of a pilot's career . The hype surrounding 787s has added an extra dimension of rivalry among pilots. Besides loss of pay opportunities , ego issues have taken over, according to Nandan.

The Air India management has decided to divide the flying rights equally between the two sections of pilots unlike United, which chose an auction-style system, selecting the initial batch of pilots based largely on their length of service . Nandan says if the seniority of all the pilots were to be accounted for, it will take another 20 years for the merger to consummate.

But opinion is divided over the decision to split flying rights. A former senior executive of Air India criticised the 50:50 division, saying the airline should have selected candidates on merit. "The division implies that the interest of the employees is what matters, not that of the airline."

Mohan Ranganathan, a former pilot and air safety consultant , says the Civil Aviation Safety Advisory Council had recommended that pilots with at least 5,000 hours of flying must fly the 787s. But the Air India management is allowing people with only 2,500-3 ,000 hours to fly the planes.

At around 500, Indian Airlines pilots have recorded five times the number of landings than Air India counterparts because they fly shorter domestic routes, he says. "And landings matter for commanders." Ranganathan says everybody is talking about the years needed to become a commander, overlooking the experience part. "No one really seems to be giving attention to the safety issues involved." But given the circumstances, the 50:50 split is the best solution, he says.

The Future

Despite the strike, Nandan remains sanguine about Air India's future. In the next five years, 7,000 people will retire, he says. Air India is an ageing airline - the average age of an Air India employee is 50 - because no major recruitment has taken place since 1989, according to him.

The mass retirement will help usher in radical changes in recruitment, he says, adding that 'reservations' in jobs will end and selection will be based on merit.
Nandan says many of Air India's problems will be resolved after the Dharmadhikari committee recommendations are implemented. He also remains optimistic about the strike by pilots. Ending the strike could be the most important step in solving the merger issues, according to him.

Chaudhuri agrees. "The sense of urgency that has now taken hold at the airline and all its stakeholders and the aggressive actions being taken to rationalise costs, integrate the two carriers, and change the incentive model for employees should bode well for Air India's turnaround," he says.

For now, the government appears to be sticking to its guns. Anyone who has followed the Air India crisis would know that the government's stand is quite unusual.

Perhaps the government can learn from the experience of Japan Airline Ltd. The airline was allowed to go bust, and then restructured, says Jenkins, adding that it is now performing much better. Jenkins says survival is not a right, in airlines or anywhere else. "It is earned by performance against competitors in the marketplace, and that requires collaboration by all key stakeholders."
An end to the agitation might be a good beginning.

Five months after its accounts were frozen for non-payment of taxes and duties, crisis-ridden Air India has piled up about Rs. 454 crore of dues but has promised to clear it as soon as it gets capital infusion from the government.

"The total service tax dues of Air India is Rs. 395 crore. We

will recover interest at the rate of 15%. Once the capital infusion happens, the company will repay the dues," official sources said.

Taking into account the 15 per cent interest, the total tax dues of the company will come to around Rs. 454 crore.

Government last month approved a financial restructuring plan for Air India with a Rs. 30,000 crore equity infusion over a nine-year period. The airline intends to clear the dues as soon as the government releases funds to it, the sources said.

Last December, the Central Board of Excise and Customs (CBEC) had frozen 11 bank accounts of Air India and 10 of Kingfisher Airlines for allegedly defaulting on service tax payments, despite collecting the same from passengers. The matter was settled after payment of part dues and hectic negotiations.

According to government officials, the total arrears pending from Kingfisher is Rs. 50 crore. The company has paid arrears between Rs. 15-20 crore each in the months of March, April and May.

Non-payment of service tax dues is a serious offence as it amounts to diversion of public money or tax revenue already recovered by the airline from the passengers or other parties for depositing with the government.

Airlines collect service tax on every ticket they sell. So, the money comes from the passenger and airlines are expected to submit it to the government in a time-bound manner and not keep it in their accounts, the officials said.

 

News 24 Desk

 

New Delhi: Stand off between Air India management and agitating pilots was continued on 13th day on Sunday. However, government has again declared strike illegal and taken action against more than 70 pilots, even then agitators were not blinking. As a result, passengers of national carrier were facing heat after dozens of flights were cancelled following their strike.

 

 

It may be mentioned here that pilots of AI were on strike since May 8. The Delhi High Court had already declared the ongoing strike as illegal. The airline has already lost over Rs 190 crore due to the stir.

 

 

Government has promised to sort out problems of pilots within three months and appealed to them to join work. Talking to media, civil aviation minister Ajit Singh said that whatever problems pilots have they should come forward and discuss.

 

"But it is not possible by creating loss or causing inconvenience to the passengers. The government will not adopt a victimisation policy, whatever problems they have will be sorted out in three months" said the minister.

 

 

 

 

 

U.K. Sinha Sebi chairman

New Delhi, May 19 (PTI): Market regulator Sebi today said all listed companies, including public sector units, will have to meet the norm of minimum 25 per cent public holding by August next year.

“We have taken it up with the government that the same (as for private sector companies) discipline should also apply to PSUs... people (PSUs) should try and honour whatever time frame has been given,” Sebi chairman U.K. Sinha said on the sidelines of a workshop here.

On whether listed companies will be able to meet the requirement given the prevailing market conditions, he said, “To talk about whether it is practical or that only when the market reaches a particular level, only then it will be sold... I think these are arguments which do not convince us.”

Sinha said listed companies were given three years to meet the requirement of minimum public holding.

While the private companies have to meet the norms by June 2013, for PSUs the deadline is August 2013.

Under a notification of the Securities Contracts Regulations (Amendment) Rules issued in 2010, the government made it mandatory for all listed entities to have a minimum public float of 25 per cent and stipulated the time limit.

As many as 181 companies from the private sector will need to sell shares worth about Rs 27,000 crore to meet the minimum public holding norms for listed firms, Sinha had said earlier.

Besides, 16 public sector units (which do not have 25 per cent public holding) will have to mobilise Rs 12,000 crore to adhere to the new flotation norms.

In January this year, Sebi had introduced Institutional Placement Programme and Offer for Sale of Shares Through the Stock Exchange with an aim to fast track the sale of promoters’ equity in listed companies to meet the minimum public shareholding norm.

The Offer for Sale of Shares, popularly known as the auction route, has since been used by three companies, including ONGC.

New investors

To minimise the risks associated with direct stock investment by new investors, market regulator Sebi has asked the government to route the tax-saving Rajiv Gandhi Equity Savings Scheme through mutual funds.

The Sebi chairman said the regulator had submitted a proposal in this regard to the finance ministry.

“The thinking in Sebi is that first-time investors may not have adequate information about the stock market... they should enter the market through an institutional investor,” he said.

“...is it right to expose an uninformed investor directly into the equity market or provide him access through mutual funds,” he asked while responding to queries on the new scheme announced by finance minister Pranab Mukherjee in his budget speech.

The minister had announced a 50 per cent tax deduction to retail investors with an annual income of less than Rs 10 lakh for investment up to Rs 50,000 in a year with a lock-in period of three years under the scheme.

Retail investors can avail themselves of the scheme only once in a lifetime. This is the first-ever tax benefit scheme announced by the government to encourage the participation of retail investors in the equity market. By offering this scheme, the government aims at channelising household savings into the stock markets.

Sinha also expressed concern that penetration of the mutual fund industry in the retail sector was not improving.

However, he said, “We are happy in one way that compared to 2010-11, in (2011-12) net inflow in equity schemes of MF is much higher”.

On equity-linked savings schemes, Sinha said there would be clarity once the direct taxes code bill was finalised.

Jitendra Avhad, the leader of AWOL Air India pilots, appears to be a man who chooses his words carefully. Members of the Indian Pilots’ Guild, who have called in sick since May 8, are not on strike but agitating, the Maharashtra legislator has told reporters and in television interviews.

Agitate could mean making (someone) troubled or nervous. Agitate could also refer to a campaign to arouse public concern about an issue in the hope of prompting action. If Avhad & Co’s intention was to trouble the government, it has not worked.

Far from troubled, the government is actually defiant. Civil aviation minister Ajit Singh has said the government was giving the national airline, which has been surviving on taxpayers’ money, one last chance to perform to qualify for a Rs 30,000-crore bailout.

That brings us to the campaign part. Assuming arousing public concern and prompting action are the reasons the pilots are striking, well, agitating, the public and the government will have to overlook a few things.
Pampered Lot?

First would be Singh’s statement on Wednesday that the management is investigating cases of theft, fraud and abuse of perks in Air India.

Second would be the validity of the IPG demand that its counterparts from the Indian Commercial Pilots’ Association be barred from training in the 787 Boeing Dreamliners the carrier is buying. IPG members belong to the erstwhile Air India and ICPA represents the Indian Airlines pilots before the two airlines were merged in 2007.

The IPG is harking back to an agreement in 2006 that said the first 12 Dreamliners be manned by Air India pilots in order of seniority. The merger obviously matters little to IPG.

Third would be the salaries of pilots. The Air India agitation is not a struggle by lowly paid employees demanding better wages and fighting inhuman work conditions.

Air India commanders (pilots with eight years of experience who are responsible for operation and safety during flights) receive around Rs 8-10 lakh a month (see Different Pay Scales).

That makes them among the highest-paid pilots in the world, according to Ravinder H Dholakia, a member of the Justice DM Dharmadhikari Committee, appointed by the government to resolve HR issues between employees of the two airlines.

Say, if these pilots fail to become commanders by a quirk of fate or by virtue of being bad pilots, they will be compensated ‘notionally’ with the same pay and allowances as commanders, according to a government official. Due to these reasons, the fight for unpaid salaries – the only demand of the pilots that makes the ‘genuine’ list – threatens to be unheard.

Rohit Nandan, chairman and managing director of Air India, says there is no justification for the strike especially when the Dharmadhikari Committee report is with the government, which has said it will soon implement its recommendations.

Experts and independent observers have criticised the strike for the same reason. Dholakia says the strike is untimely and premature. “The pilots should have waited for the implementation of the report.”

BRUSSELS/LONDON: European officials are working on contingency plans in case Greece bombs out of the euro zone, the EU's trade commissioner said on Friday, as European share prices tumbled and Germany warned of continuing financial turmoil.

German finance minister Wolfgang Schaeuble, one of Greece's harsher critics, said market unrest fuelled by the euro zone debt crisis could last another year or two. "Regarding the crisis of confidence in the euro ... in 12 to 24 months we will see a calming of the financial markets," he said.

Germany seemed to be increasing pressure on Athens when Greece's government spokesman said that Chancellor Angela Merkel raised the idea of Greece holding a referendum on its eurozone membership -- something Berlin promptly denied.

European shares hit their lowest level since December, depressed by the prospect of a Greek euro exit spreading a wave of contagion in the currency bloc which could engulf much larger economies such as Spain's.

Policymakers insist they want Greece to remain in the euro zone but European Union trade commissioner Karel De Gucht said the European Commission and the European Central Bank were working on scenarios in case it has to leave.

"A year and a half ago there maybe was a risk of a domino effect," De Gucht told Belgium's Dutch-language newspaper De Standaard.

"But today there are in the European Central Bank, as well as in the Commission, services working on emergency scenarios if Greece shouldn't make it. A Greek exit does not mean the end of the euro, as some claim."

Speculation about such planning has been rife, but de Gucht's comments, which were confirmed by a person close to him, appeared to be the first time an EU official has acknowledged the existence of contingencies being drawn up .

A German finance ministry spokeswoman, asked about plans for a possible Greek exit, said without elaborating: "The German government naturally has the responsibility to its citizens to be prepared for any eventuality."

But the European Commission's top economics official, Olli Rehn, later dismissed De Gucht's comments.

"Karl De Gucht is responsible for trade. I am responsible for financial and economic affairs and relations with the European Central Bank." Rehn said. "We are not working on the scenario of a Greek exit. We are working on the basis of a scenario of Greece staying in."

A spokesman for the Commission, the EU's executive, also wrote on Twitter there was no active planning.

"(The) European Commission denies firmly (that it) is working on an exit scenario for Greece," Oliver Bailly wrote. "(The) Commission wants Greece to remain in the euro area."

Confusion increased when Greek government spokesman Dimitris Tsiodras said that Merkel raised with the Greek president the idea of Greece holding a referendum on its euro zone membership next month, together with national elections.

Tsiodras's statements evoked memories of a bitter row between Athens and the EU last year, when Greece's then Prime Minister George Papandreou proposed a referendum on the country's bailout deal -- an idea the EU vehemently rejected, helping accelerate the downfall of Papandreou's government.

Greek political leaders on Friday angrily rejected a referendum and a German government spokesman denied that Merkel ever proposed it. "This is false and we completely dismiss this," the spokesman told Reuters.

World shares slid and German borrowing costs hit record lows as uncertainty about Greece's future in the euro zone and a deepening Spanish banking crisis bolstered safe-haven assets.

Investors were rattled by a ratings downgrade of 16 Spanish banks by Moody's Investors Service, although the move had been expected.

Sentiment has soured to such an extent that an opinion poll showing Greeks are returning to establishment parties which support the country's bailout had little impact.

If they vote that way in June 17 elections, Greece's place in the euro zone would look more secure and the threat of contagion to countries such as Spain would diminish.

The poll, the first conducted since talks to form a government collapsed and a new election was called, showed the conservative New Democracy party in first place, several points ahead of the radical leftist SYRIZA which has pledged to tear up its 130 billion euro bailout programme.

"It's up to Greek politicians to explain the reality to their people and not make false promises," Schaeuble told France's Europe 1 radio. "We want Greece to stay in the euro but meet its commitments and that's a decision that's up to the Greeks."

Spanish losses

The biggest fear for European leaders is that a Greek meltdown, which would surely follow the stoppage of its bailout funds, triggers a domino effect among the currency bloc's weaker members.

Even aside from the contagion threat, they have huge problems of their own.

Spanish banks' bad loans rose in March to their highest level in 18 years, figures from the Bank of Spain showed on Friday, underscoring the problems facing the government as it attempts to clean up the sector.

The Bank of Spain said bad loans rose to 8.37 percent of the banks' outstanding loans, the highest since August 1994 and up from 8.3 percent in February.

Banks beset by bad property loans which could deteriorate further, along with overspending in indebted regions, are the two biggest risks for Spain's public finances.

Investors believe Spain needs to aggressively address these two issues to avoid a bailout and pushed Spanish borrowing costs to euro-era highs this week.

The fact the euro zone crisis is moving back into an acute phase will place it centre stage at a weekend summit of leaders of the G8 top industrialised nations.

President Barack Obama, the G8 host, has urged European leaders repeatedly to do more to stimulate growth, fearing contagion from the euro crisis that could hurt the U.S. economy and his chances of re-election in November.

New French President Francois Hollande is pressing for measures to boost growth rather than cut debt, Britain's David Cameron has become increasingly vocal in demanding Europe acts more decisively, Canada's Stephen Harper has been a frequent critic, and of the euro zone G8 members, Italian premier Mario Monti was calling for pro-growth policies before Hollande was.

That could leave Germany's Angela Merkel, who insists debt-cutting programmes cannot be diluted, cutting a lonely figure.