Merkel switches to upbeat signals before debt crisis summit

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Germany switched signals on Wednesday, suggesting that deadlock over a Greek rescue can be broken at a eurozone debt summit, after the European Commission warned that Europe is at risk.

The German government voiced confidence that Chancellor Angela Merkel and French President Nicolas Sarkozy will reach an agreement during talks in Berlin on the eve of Thursday's summit of 17 eurozone leaders.

"Germany and France ... must agree. If this does not happen then we can't make progress in Europe. There is confidence on both sides that such a common line can be worked out this evening," said Merkel's spokesman Steffen Seibert.

He told a regular government briefing in Berlin that Merkel was "very confident" that the summit in Brussels will produce a "good result."

His comments marked a change in tone after Merkel on Tuesday played down expectations of a "spectacular," all-encompassing solution at the summit.

Berlin has been at odds with Paris and the European Central Bank over the terms of a second bailout for Greece, one year after Athens received a first 110-billion-euro ($156-billion) EU-IMF bailout that failed to put the country back on its feet.

Berlin insists that private bond holders must share the costs of a new bailout, even if it means triggering some sort of Greek default, an outcome vehemently opposed by the ECB and France.

Nervous markets are awaiting the outcome of the summit with bated breath after several rocky days for the euro and stock markets with debt crisis contagion threatening to engulf Italy and Spain.

"Nobody should be under any illusion: The situation is very serious," European Commission President Jose Manuel Barroso said in a speech.

"It requires a response. Otherwise the negative consequences will be felt in all corners of Europe and beyond," he said.

In Paris, French government spokeswoman and Budget Minister Valerie Pecresse said: "We have one priority, an urgent one, which is to find a lasting solution to the Greek question."

The embattled Greek government said the meeting "will determine the future of Greece and of Europe."

Senior eurozone finance officials were to hold another round of negotiations in Brussels on Wednesday to lay the groundwork for the summit.

A special tax on eurozone banks has emerged as a potential compromise, but the French and German banking federations have voiced concerns about such a solution.

Another option is for eurozone states to lend Greece money with which it can buy back its own debt at a reduced price on secondary bond markets, allowing the nation to reduce its debt mountain.

The eurozone is under global pressure to resolve the crisis once and for all.

The International Monetary Fund, a contributor to bailouts of Greece, Portugal and Ireland, urged eurozone leaders to take urgent action, warning that any delays "could be costly for the euro area and the global economy."

IMF chief Christine Lagarde, the former French finance minister, will attend the summit in her first international appearance as the global lender's managing director since she took office on July 5.

US President Barack Obama discussed the crisis in a telephone converstation with Merkel on Tuesday.

"They agreed that dealing effectively with this crisis is important for sustaining the economic recovery in Europe as well as for the global economy," the White House said in a statement.

Carsten Brzeski, senior economist at ING Belgium, said the "biggest challenge" for eurozone leaders is to "come up with a plan to prevent further contagion."

© 2011 AFP

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