Eurozone grapples with Greek debt deadlock

19th July 2011, Comments 0 comments

Eurozone governments wrestled on Tuesday with tough options to break an impasse over a new Greek bailout ahead of a critical summit as pressure mounts on them to solve an epic debt crisis.

After several turbulent days for the euro and European stock markets, the eurozone is scrambling to seal a deal and prevent the crisis from dragging down bigger nations, with Italy and Spain in the firing line.

Spain had to offer increased rates to borrow short-term money on Tuesday, but long-term borrowing rates for Spain and Italy eased although remained exceptionally high.

Greece also borrowed short-term money at slightly easier, but still high, rates.

Germany and France, at odds over Berlin's insistance on involving private bond holders in the second Greek bailout, voiced optimism that an agreement demanded by the markets would emerge at the summit on Thursday.

"I am confident," French Finance Minister Francois Baroin said in Washington, where the US Treasury Secretary Timothy Geithner renewed calls for European leaders to find a lasting solution.

"There are a lot of discussions on the telephone. People are working hard on a solution which allows -- and this is the aim of France's position -- the avoidance of a (sovereign) default or a credit event," he said.

Senior government officials from eurozone nations are holding regular talks, including in Brussels on Tuesday, in the hope of reaching a deal by Thursday, one year after Greece received a bailout of 110 billion euros ($154 billion) from the European Union and International Monetary Fund.

Late on Monday, a special tax on eurozone banks emerged as a potential compromise after governments had struggled for weeks to agree on involving the private sector in the second bailout without triggering a devastating default.

Germany, the eurozone's paymaster, Finland and the Netherlands want banks, insurers and other private investors bear some of the burden rather than just leave it to the taxpayer to stump up again.

The European Central Bank and other eurozone states are opposed because forcing private investors to effectively take losses on their holdings of Greek government bonds would amount to a default.

"A credit event, selective default or default must be avoided," ECB president Jean-Claude Trichet told the Slovak daily Hospodarske Noviny.

"We ask the eurozone governments to find appropriate solutions as soon as possible," he said, repeating ECB warnings that the bank will cease financing the Greek banking sector if the rescue puts Athens into default.

But an ECB governor, Ewald Nowotny, broke ranks, telling CNBC television that proposals that would trigger a "short-lived selective default" should be studied because it "would not really have major negative consequences."

France had suggested that the banks could participate on a "voluntary" basis but credit ratings agencies said that this would not avert a default rating.

French European Affairs Minister Jean Leonetti said on Monday the bank tax proposal "would have the advantage of not involving the private banks directly and so avoid the problem of a potential default."

EU officials have also mooted a convoluted plan to lend Greece money with which it can buy back its own debt at a reduced price on secondary bond markets, effectively postponing its repayments to give it breathing space.

German Chancellor Angela Merkel has made clear she wants a deal on the table by Thursday after she forced EU president Herman Van Rompuy to cancel plans for a meeting last Friday following a raucous week in the markets.

She even warned at the weekend that she would attend Thursday's summit only if a concrete result was in the offing, but her spokesman indicated that she would go to Brussels after all.

"The government is working on all levels with all its strength on preparing for Thursday a good result, a decent result, a result that sends out a strong and clear signal to the markets," her spokesman Steffen Seibert said on Monday.

Moneycorp, a London-based foreign exchange firm, said that eurozone leaders had to find a "viable strategy to kick the debt problem not just into touch but out of the ground."

"For the summit to come up with yet another stopgap measure would be almost worse than no result at all," the firm wrote in a note to investors.

© 2011 AFP

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