Merkel to meet IMF chief in euro crisis flurry

Ratings agency Fitch offered a ray of light for the eurozone Tuesday ahead of talks between German Chancellor Angela Merkel and IMF chief Christine Lagarde on Greece's struggle to cut its debt.

While Italy is the most worrying of the embattled eurozone countries and could see its credit rating cut this month, Fitch warned, France's top triple-A rating was safe for 2012 barring any significant economic shocks.

Fitch Managing Director David Riley also warned at a news conference that an exit by Greece from the eurozone in 2012 was a possibility.

With the eurozone crisis showing little sign of abating, Merkel was due to press on with an intensive three-day diplomatic push, meeting the International Monetary Fund head at 1900 GMT.

Before Merkel, Lagarde met German Finance Minister Wolfgang Schaeuble, his ministry said. No press conferences were scheduled.

Greece, which is again in the eye of the storm as it races to reduce its debt in a bid to secure more aid, is set to focus minds ahead of a crucial assessment of its latest efforts.

Athens must ensure the "rapid implementation" of reform measures, Merkel told reporters after Monday talks with French President Nicholas Sarkozy, warning that "otherwise it will not be possible to pay the next (aid) tranche to Greece.

"But this is what we want and we want Greece to remain in the eurozone," she underscored, adding that Greece would feature in her talks with Lagarde.

Athens is again under heightened pressure after the IMF reportedly expressed growing doubts over Greece's long-term ability to reduce its massive debt mountain of 350 billion euros.

International auditors are due back in Greece next week to take stock of the country's economy after Prime Minister Lucas Papademos warned of an "uncontrolled default" in March if no further aid was forthcoming.

Having already received most of a 110-billion-euro rescue package from the EU and IMF in 2010, the eurozone reached a preliminary accord for a second 130-billion-euro Greek bailout in October.

However this rescue package depends on Greece reaching a deal with private investors to accept at least a 50-percent loss on the Greek government bonds they hold, saving Athens another 100 billion euros.

Meanwhile, banks' deposits with the European Central Bank hit a new record, data showed, suggesting continuing tensions in the financial system despite unprecedented injections of liquidity.

However, in another test of market sentiment, Athens paid slightly lower but still high rates to raise 1.6 billion euros ($2.08 billion) in six-month treasury bills, finding solid demand.

Austria, by contrast, paid higher funding costs to sell four-year bonds than at a previous auction, suggesting investors were uneasy over the country's exposure to Hungary.

An EU spokesman said economic affairs chief Olli Rehn would hold talks with a Hungarian negotiator on January 20 to discuss a request for financial aid and a disputed central bank law.

Budapest sought help from the IMF and EU in November after its currency plunged, but creditors cut short initial talks over the central bank reforms which they said would end the Hungarian institution's independence.

Ireland, which in November 2010 received an 85-billion-euro EU-IMF bailout, was due to begin its latest quarterly review of its implementation of economic reforms, the finance ministry said.

European stocks rallied and the euro rose against the dollar after sliding to its lowest level since September 2010 as Chinese data and upbeat US company results overshadowed fears over the eurozone debt crisis, dealers said.

Merkel Wednesday is due to host Italian Prime Minister Mario Monti. Lagarde, for her part, goes on to Paris to meet Sarkozy, his office said.

Less encouraging for Sarkozy who is fighting for re-election was new data showing the French economy was flat between the third and fourth quarters of 2011.

"The situation is tense, very tense," Sarkozy told reporters after his talks with Merkel in which they both vowed to speed up a raft of measures to combat the debt turmoil.

Analysts saw little by way of new developments from the meeting.

"As the risk of a disorderly Greek default is once again on the rise, with the threat of contagion to Italy and others, the IMF is increasingly likely to get involved with at least precautionary funds for Italy and possibly Spain," said Thomas Harjes, an economist at Barclays Capital.

The Danish EU presidency rejected a bid to tax financial transactions across the 27-member bloc, and also cautioned against the eurozone imposing the tax on its own, as suggested by Paris and Berlin.

-- Dow Jones Newswires contributed to this report --