FRENCH PRESIDENT Nicolas Sarkozy will meet German chancellor Angela Merkel in Berlin today as intensive talks continue in advance of a summit of EU leaders on the euro zone’s debt crisis.
The hastily arranged meeting, agreed during a phone call between the two leaders last night, comes amid signs that EU leaders gathering in Brussels tomorrow are ready to grant Greece loans from the euro zone stability fund (EFSF) to buy back sovereign debt from the market at a discount.
Greek officials said such a deal was “attainable” while German sources said it provided an “elegant” way of reducing Greek debt with a voluntary, yet substantial, private-sector involvement.
Growing determination to deal with Greece and reduce the risk of contagion, means the issue of loan interest rates will be addressed only if sufficient time is available, according to German sources.
Dr Merkel hit out at critics who have accused her of reacting too slowly to events, saying they had “clearly not understood the magnitude” of the crisis.
“The impression is made that everything would be fine if the subject of Greece and the euro could be resolved,” she said, adding this ignored the root of the problem: indebted euro zone members.
German officials said yesterday they were confident the “core issues” of a second Greek plan will be worked out tomorrow but Dr Merkel said she “will not yield” to calls for a quick, superficial fix.
The euro dropped in trading after her remarks following a rally earlier in which yields on Spanish and Italian 10-year bonds dropped from highs earlier this week.
German and Dutch insistence on private-sector involvement in a second Greek rescue package – worth at least €115 billion – had been seen as the major obstacle to agreement.
Agreeing to give Greece loans worth a reported €30 billion to buy back its own debt would be controversial with many Germans, who increasingly see Greece as a money pit. But she could portray the loans as a small price for greater stability and punishment of financial sector speculators.
Dr Merkel’s junior coalition partners, the Free Democrats (FDP), gave a clear signal yesterday that they would back such a buyback.
“The rescue fund cannot be allowed become a creditor of Greece by buying up bonds on secondary markets,” warned Philip Rösler, FDP leader. A party adviser added the party could envisage the Greeks using EFSF loans to buy up bonds themselves.
“What isn’t possible for us leaves, by deduction, what is possible,” said the source. “It would be an elegant solution that would meet our central demand of private-sector involvement without force.” Berlin officials said binding decisions would not be made tomorrow but by euro zone finance ministers later.
Besides buybacks, leaders will discuss a bank levy to be imposed on all European financial institutions to pay for further bailouts, a measure that enjoys the approval of Paris and Athens.
“Our goal is to avoid even a selective default,” said Greek finance minister Evangelos Venizelos, who favours the bank levy. He said he was “guardedly optimistic” that a deal can be found that to “satisfy everyone”.
Despite a full summit agenda, French officials in Brussels expressed optimism yesterday that a rate cut deal for Ireland, as part of a wider rate cut package, was now within reach.
Talks over Ireland’s interest rate have shifted from Paris to Brussels and Irish officials are hopeful that a wider deal to reform the bailout fund will achieve Dublin’s objectives while ending the stand-off with France.
Meanwhile, Austrian central banker Ewald Nowotny caused confusion and a surge in Greek borrowing costs after suggesting that a Greek rescue deal could involve a short-term default without disastrous consequences.
Until now ECB president Jean-Claude Trichet has insisted all defaults carry inherent, unpredictable risk.
After his remarks were broadcast, Mr Nowotny issued a statement saying he was in “complete agreement” with Mr Trichet that the euro zone must “avoid any situation that would make it impossible for the ECB to continue to accept Greek sovereign bonds as collateral”.
