Merkel, Sarkozy seek late-night euro breakthrough

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The leaders of France and Germany sought in late-night talks Wednesday to break a deadlock on a new Greek bailout after dramatic warnings a day before a eurozone summit on the bloc's debt crisis.

German Chancellor Angela Merkel and French President Nicolas Sarkozy were also joined by European Central Bank president Jean-Claude Trichet in Berlin, a diplomatic source and a member of the French delegation told AFP.

"There is confidence on both sides that such a common line can be worked out this evening," Merkel's spokesman said Steffen Seibert said, adding Merkel was "very confident" Thursday's Brussels summit would produce a "good result".

"This is uncharted territory for all those involved. But this is a challenge that we must all overcome," Seibert said, saying the eurozone was facing its "biggest-ever test".

A day earlier Merkel had unsettled markets with more cautious remarks, downplaying expectations that the Brussels get-together would result in something "spectacular" to end Europe's problems in one fell swoop.

"Nobody should be under any illusion -- the situation is very serious," European Commission President Jose Manuel Barroso warned on Wednesday.

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

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".

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

US President Barack Obama discussed the crisis in a phone call with Merkel on Tuesday. The White House said they had agreed that "dealing effectively with the crisis" was important not only for Europe but also beyond.

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

Berlin has been at odds with the ECB and Paris over Merkel's demands for private investors to shoulder some of the bill for what will be the eurozone's fourth bailout.

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.

Alternatives floated include a bank levy or for the European Financial Stability Facility (EFSF) to lend money to Athens for it to repurchase Greek bonds, thereby reducing its debt mountain.

On Wednesday, a senior panel advising the German government said it supported a bond buy-back, along with a substantial "haircut" on Greek debt. Merkel's spokesman said only she had "taken note".

The ECB's chief economist Juergen Stark said in a Boersen-Zeitung interview to appear Thursday that such a scheme might work but that markets would likely still feel Athens had defaulted.

Capital Economics said the fact that a bank levy was being discussed "suggests that eurozone policymakers are more concerned about appeasing taxpayers than adopting bold and decisive measures".

© 2011 AFP

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