Eurozone split over private sector role in debt rescue fund

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The eurozone's northern and southern nations are locking horns over whether the private lenders should automatically participate in bailouts of distressed nations, diplomats said Friday.

France, Italy and Spain want to remove a clause from the EU's future, permanent rescue fund that would make private sector investors take losses as part of bailouts, the sources said, confirming German newspaper reports.

"We have always said that we should not add uncertainty in the markets," said a diplomat from one of the countries reluctant to force banks and investment funds to be attached to debt rescues.

The diplomat said that insisting on making the private sector participate in a second Greek bailout at a July summit had increased tension on the markets.

The European Stability Mechanism (ESM) is scheduled to begin operations in 2013, succeeding the temporary 440-billion-euro European Financial Stability Facility (EFSF). The ESM could, however, be activated next year.

Europe's paymaster Germany, backed by Finland and the Netherlands, insists on keeping the clause requiring a private sector role in the ESM, another diplomat said.

"The debate is not new and it has taken place within the eurozone for a while," the source said.

The German, Finnish and Dutch finance ministers met on Friday to discuss the two-year-old debt crisis.

The euro area's 17 finance ministers meet in Brussels on Tuesday, when the issue of the ESM could be raised.

Private sector creditors have been forced into accepting a 50 percent loss on their holdings of Greek government bonds, equal to 100 billion euros ($133 billion), as part of the second bailout for Athens agreed earlier this year.

France and Italy want the change as they believe that the participation of private investors in the second Greek bailout only increased tensions on the markets and made the eurozone debt crisis harder to manage, the Suddeutsche Zeitung said its edition to appear on newstands Saturday.

A sale of German bonds, usually seen as the safest of investments, flopped this week, suggesting that the eurozone debt crisis was spreading even to core eurozone states after snaring Greece, Ireland and Portugal, and threatening to swallow up Italy and Spain.

Germany's borrowing costs rose above those of non-euro Britain on Thursday.

"That is an extremely rare phenomenon that has only happened very briefly since the creation of the eurozone and that shows well there are starting to be concerns about Germany," said debt strategist Patrick Jacq at BNP Paribas bank.

"At this moment, nobody wants eurozone sovereign bonds," the newspaper quoted a source close to the German government as saying.

Germany, which has been the driving force behind forcing private investors to accept losses as part of bailouts, wants the introduction of the ESM to be sped up.

German Finance Minister Wolfgang Schaeuble wants the ESM brought in sooner as he believes it will be more credible in the eyes of investors, the Die Welt newspaper reports in its Saturday edition.

© 2011 AFP

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