Eurozone fights divisions on debt crisis before summit

20th July 2011, Comments 0 comments

The eurozone accelerated efforts on Wednesday to agree a new Greek bailout, with the German and French leaders set to meet on the debt crisis before a critical eurozone summit.

With global pressure mounting for a quick fix to the euro's troubles, Chancellor Angela Merkel was to host President Nicolas Sarkozy in Berlin on Wednesday before heading to Brussels the next day for the eurozone summit.

But chances for a blockbuster deal that markets say is needed looked slim after Merkel cautioned that the meeting of the euro area's 17 leaders would not produce a dramatic, all-encompassing solution to the problem.

In a sign of the growing concerns that Europe's crisis threatens the international financial sector, US President Barack Obama waded into the discussion in telephone talks with Merkel on Wednesday.

"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.

Senior eurozone finance officials were to hold another round of negotiations in Brussels on Wednesday, one year after a first 110-billion-euro EU-IMF bailout that failed to put Greece back on its feet.

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.

"The eurozone debt crisis has moved into a worrisome new phase," said Carsten Brzeski, senior economist at ING Belgium, adding that the "biggest challenge" for eurozone leaders is to "come up with a plan to prevent further contagion."

"The fact that German Chancellor Angela Merkel yesterday said that the sovereign debt crisis can't be fixed 'in one spectacular step,' unfortunately, isn't encouraging," Brzeski said.

The German leader voiced concerns on Tuesday about ideas such as restructuring Greece's debt, creating joint euro-area bonds or forming a transfer union, a step towards a federal Europe.

Merkel said governments needed to reduce their debt and improve competitiveness. "Thursday will help in this but further steps will be needed, not one spectacular event solving all problems."

Germany, the eurozone's paymaster, Finland and the Netherlands have been at odds with the European Central Bank and other eurozone governments over the terms of a new bailout for Greece.

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

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, effectively postponing its repayments to give it breathing space.

French Finance Minister Francois Baroin insisted that eurozone countries are in harmony as he played down divisions over what burder banks should bear.

"There is a very broad convergence of views," he told France Info radio. "There is a will to make Greece's debt more manageable and there are still discussions to be had about the share of the private sector."

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.

Greek Foreign Minister Stavros Lambrinidis said the EU was facing a huge test of its values. "It is my firm belief that we are at a crossroads in Europe," he said during a visit to Poland.

© 2011 AFP

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