PARIS/ATHENS (Reuters) - In a bizarre twist to the Greek debt crisis, France and Germany are pressing Greece to buy their gunboats and warplanes, even as they urge it to cut public spending and curb its deficit.

A Fremm multimission frigate in an undated image courtesy of DCNS. REUTERS/Handout

Indeed, some Greek officials privately say Paris and Berlin are using the crisis as leverage to advance arms contracts or settle payment disputes, just when the Greeks are trying to reduce defense spending.

“No one is saying ‘Buy our warships or we won’t bail you out’, but the clear implication is that they will be more supportive if we do what they want on the armaments front,” said an adviser to Prime Minister George Papandreou, speaking on condition of anonymity because of the diplomatic sensitivity.

Greece spends more of its gross domestic product on the military than any other European Union country, largely due to long-standing tension with its neighbor, historic rival and NATO ally, Turkey.

“The Germans and the French have them over a barrel now,” said Nick Witney, a former head of the European Defense Agency.

“If you are trying to repair Greek public finances, it’s a ludicrous way to go about things.”

France is pushing to sell six frigates, 15 helicopters and up to 40 top-of-the-range Rafale fighter aircraft.

Greek and French officials said President Nicolas Sarkozy was personally involved and had broached the matter when Papandreou visited France last month to seek support in the financial crisis.

FRIGATE PURCHASE

The Greeks were so sensitive to Sarkozy’s concerns that they announced on the day Papandreou went to Paris that they would go ahead with buying six Fremm frigates worth 2.5 billion euros ($3.38 billion), despite their budget woes.

The ships are made by the state-controlled shipyard DCNS, which is a quarter owned by defense electronics group Thales TCFP.PA and may have to lay workers off in the downturn.

Greece is also in talks buy 15 French Super Puma search-and-rescue helicopters made by aerospace giant EADS EAD.PA for an estimated 400 million euros.

The Rafale, made by Dassault Aviation AVMD.PA, is a more distant and vastly dearer prospect. There is no published price, but each costs over $100 million, plus weapons.

Germany is meanwhile pressing Athens to pay for a diesel-electric submarine from ThyssenKrupp TKAG.DE, of which it refused to take delivery in 2006 because the craft listed during sea trials following a disputed refurbishment in Kiel.

Payment would clear the way for ThyssenKrupp to sell its loss-making Greek unit Hellenic Shipyards (HSY), the biggest shipbuilder in the eastern Mediterranean, to Abu Dhabi MAR (ADM), industry sources said.

ThyssenKrupp Marine Systems last year canceled a Greek order for four other submarines over the dispute, in which it said Athens’ arrears exceeded 520 million euros.

Witney, now at the European Council on Foreign Relations, said German officials were embittered by Greek behavior in the long-running dispute, as well as previous payment problems over the purchase of German Leopard II tanks.

Greek Deputy Defense Minister Panos Beglitis told Reuters the dispute was on the brink of settlement but denied the timing had anything to do with Athens’ bid to clinch German backing this week for a financial safety net for Greek debt.

“(The submarine) Papanicolis has been carefully inspected by German and Greek experts. It has been greatly improved and declared seaworthy. We will take it, sell it and make a profit,” he said in an interview.

“We are paying 300 million (euros) and we will sell it for 350 million,” Beglitis said. Witney questioned Greece’s chances of turning a profit on a second-hand submarine.

NO LINKAGE?

Asked whether big European suppliers were using the crisis to press arms sales on Athens, he said: “This has always been the case with these countries. It is not because of the crisis, there is no link.”

Beglitis said this year’s defense budget was set at 2.8 percent of GDP, down from 3.1 percent in 2009. Non-government sources say the real level of military spending may be higher.

“Our strategy is continuously and steadily to reduce spending. This is also in line with the Greek stability and growth program,” Beglitis said. The program, submitted to the EU, pledges to reduce the budget deficit from 12.9 percent last year to below 3 percent by the end of 2012.

Western officials and economists have advocated a radical reduction of the armed forces as a long-term way of reducing structural spending, but Greek officials say that would require a real improvement in relations with Turkey.

Despite warmer ties, the two countries remain in dispute over Cyprus and maritime boundaries and have sporadic aerial incidents over the Aegean Sea.

French economist Jacques Delpla said Greece could reap big savings if it moved jointly with Turkey and Cyprus to settle disputes in the Aegean and Eastern Mediterranean and engaged in mutual disarmament.

“Unlike Portugal or Ireland, Greece could benefit from significant peace dividends to reduce its titanic fiscal deficits,” he said.

Beglitis said Turkish Prime Minister Tayyip Erdogan had mooted the idea of mutual defense spending cuts in public but not followed it up.

“There was some rhetoric from Mr Erdogan on this but there are no negotiations at the moment,” he said.