Germany, France reach debt deal before crunch summit

21st July 2011, Comments 0 comments

Eurozone leaders gathered Thursday for an emergency summit under pressure to save the euro from a debt crisis after Germany and France reached an 11th-hour compromise on a new Greek bailout.

German Chancellor Angela Merkel and French President Nicolas Sarkozy, the eurozone's powerbrokers, agreed on a joint position after late-night talks in Berlin just hours before the summit in Brussels, French officials said.

Officials refused to provide any details but the Franco-German agreement will lay the groundwork for negotiations between the eurozone's 17 leaders after weeks of debate over how to put a lid on the year-long debt crisis.

"It was a vital precondition to reassure our partners," French government spokeswoman Valerie Pecresse told France 2 television.

"We must build the widest possible consensus and the first building block of that consensus, is obviously a common position" between France and Germany, she added.

European Central Bank president Jean-Claude Trichet, who has warned against any arrangement that would lead to a Greek debt default, took part in the seven-hour meeting.

On the eve of the summit, which starts at 1100 GMT, the European Commission president Jose Manuel Barroso warned that "history will judge this generation of leaders harshly" if they fail to find a solution to the crisis.

"It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond," Barroso warned on Wednesday.

"Leaders need to come to the table saying what they can do and what they want to do and what they will do. Not what they can't do and won't do."

French Foreign Minister Alain Juppe also warned of the stakes involved: "We absolutely must find a solution in order to end international speculation and stabilise the eurozone... If this eurozone collapses it would be a disaster."

Nervous financial markets are keenly awaiting the outcome of the summit following several tumultuous days, with debt crisis contagion threatening to engulf Italy and Spain, the eurozone's third and fourth-largest economies.

Merkel had unsettled markets on Tuesday by downplaying expectations that the Brussels get-together would result in something "spectacular" to end Europe's problems in one fell swoop.

"Today's summit could provide the last chance for eurozone policymakers to get a grip on the region's debt crisis," said the research firm Capital Economics. "Anything other than a very decisive response could see the situation become irretrievable."

The European Union and the IMF provided last year a 110-billion-euro bailout to Greece that has proved insufficient. Since then, Ireland and Portugal received their own multi-billion-euro rescues.

Germany, backed by the Netherlands and Finland, had been at odds with the ECB and Paris over Merkel's demands for private investors to shoulder some of the bill for the second Greek rescue.

There are concerns that any change to the terms of outstanding Greek sovereign bonds could prompt rating agencies to declare Athens in default, with potentially dramatic consequences.

The bosses of major European banks will attend the summit, the German newspaper Bild reported.

Several options have been discussed, including a Greek bond swap to cut the country's debt by 90 billion euros and a special bank tax to raise another 50 billion euros, said a source familiar with the discussions.

The swap plan would offer financial incentives to Greece's private creditors, banks, insurers and other investors, in order to encourage them to exchange holdings maturing over the next eight years for new 30-year bonds.

The idea would be to give Athens time to revive its economy and clean up its public finances while reducing a debt mountain, which has reached 350 billion euros.

The new rescue package could also include loans from eurozone nations and the IMF to the tune of 71 billion euros, with longer maturities and more affordable interest rates, the source said.

© 2011 AFP

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