Merkel Greek climbdown soothes markets

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German Chancellor Angela Merkel Friday veered away from a collision course with the European Central Bank over Greece, soothing markets through a show of unity alongside French President Nicolas Sarkozy.

Amid a raft of warnings that Berlin's terms for the eurozone's fourth emergency bailout could trigger a potentially disastrous Greek debt default, Merkel appeared to back down after talks with Sarkozy in Berlin.

Yields on Greek bonds fell and the euro rose, with UniCredit economist Andreas Rees saying Merkel and Sarkozy had "made a first step towards compromise and to salvaging (Europe's) capacity to act."

"We are well aware of these worries, which is why we are calling for a solution as soon as possible," Merkel, the head of Europe's top economy and the biggest contributor to the eurozone's three bailouts so far, told reporters.

"The main message is of voluntary involvement (of private investors in the rescue). This is an important message to the banks. There are concerns that we wanted to create a so-called 'credit event'. That is not what we want."

Merkel said she now backed a new package for Athens along the lines of a deal on Romanian debt agreed in Vienna in 2009, whereby private banks agreed to buy new government bonds to replace ones that matured.

"The Vienna Initiative, as it is known, is a good foundation and I believe we can achieve something on this basis," Merkel said.

This "rollover" option is favoured by the ECB and France, since it avoids the risk of rating agencies declaring Athens in default, something which could send shock waves through the European and global financial systems.

Belgian Finance Minister Didier Reynders warned on Friday that the impact could be similar to that of the 2008 collapse of US bank Lehman Brothers which triggered the worst global financial crisis since the 1930s.

With an electorate hostile to more bailouts, Merkel had been pressing for private investors to contribute up to a third of Greece's second rescue package by extending maturities on Greek bonds they hold by several years.

Critics said this was akin to twisting private investors' arms and the credit ratings agencies warned they would consider such a move to amount to a default.

Europe on Thursday sought to buy time, with European Union commissioner Olli Rehn saying Greece could receive a 12-billion-euro ($17.1-billion) tranche of loans under last year's 110-billion-euro rescue.

But after signals that the EU might wait until next month, and perhaps even until September, to nail down the final details on a new package, expected to be worth nearly as much as their first, Merkel and Sarkozy said time was short.

"We need a solution as soon as possible so that we have clarity ... We have been talking about this for the whole of May and June, discussing the same issues again and again without resolving them," Merkel said.

"Germany and France are determined at the upcoming EU summit (on June 23-24) ... to say that we want a quick solution."

"There is no time to lose," Sarkozy said.

The two also stressed that the rescue package be fully in accordance to the wishes of the ECB.

"There will be meetings all next week. The sooner the technical details are worked out the better," Sarkozy said.

"The aim of today's meeting was to set down the basic principles as precisely as possibly. Once these principles are worked out then the modalities for the package can follow very quickly."

Both leaders also called for a full report on Greece's finances by the "troika" of its international creditors -- the EU, the International Monetary Fund and the ECB -- to be presented as soon as possible.

Greece, though, is in political turmoil, with Prime Minister George Papandreou axing his finance minister Friday in a reshuffle a day after a party revolt by disgruntled backbenchers and angry protests in Athens.

If Papandreou's government, which has promised an unpopular new austerity package worth more than 28 billion euros, loses a vote of confidence on Tuesday, Europe badly needs a "Plan B," said UniCredit's Rees.

© 2011 AFP

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