German Chancellor Angela Merkel and French President Nicolas Sarkozy will outline a joint position to solve Greece's debt crisis when they arrive in Brussels for a summit convened to stamp out contagion in European bond markets.
The pact was agreed on after a seven-hour meeting in Merkel's Chancellery in Berlin that ended after midnight, according to a statement distributed to reporters. Merkel and Sarkozy “listened” to the views of European Central Bank President Jean-Claude Trichet, who was also present, though the statement didn't say if they settled differences on whether Greece should be allowed to default.
European Union officials will follow a two-pronged approach today, focusing on the need to agree on a second bailout for Greece and measures that stop the debt crisis engulfing Italy and Spain. Greek options include funding a rescue using a bank tax, allowing investors to roll over Greek debt, cutting the interest rates on outstanding bailout loans and managing a bond default.
Leaders may also consider broader steps for stopping the 21-month sovereign debt crisis previously rejected by Germany, including the use of precautionary credit lines, a person close to the talks said yesterday. Deutsche Bank AG Chief Executive Officer Josef Ackermann was among those entering today's talks.
Plunging Bonds
Leaders are due to gather at 1 p.m. in the Belgian capital after meetings of national government officials earlier in the day. Belgian Finance Minister Didier Reynders told Le Soir newspaper a second Greek rescue would be worth around 110 billion euros ($157 billion).
The yield on Greece's two-year bonds rose above 40 percent for the first time yesterday after weeks of bickering among officials on how to prod bondholders into co-funding a new Greek package. The debate has unsettled investors who have also dumped Spanish and Italian bonds, sending the spread over German bunds to euro-era highs.
The euro rose to a one-week high against the dollar after the announcement of a common position early today. The 17-nation currency traded at $1.4283 as of 8:42 a.m. in Brussels from $1.4215 in New York yesterday, after touching $1.4274, the strongest level since July 14.
The Berlin talks took place amid growing pressure on Merkel to take charge of Europe's crisis response two days after President Barack Obama spoke by phone with her to discuss the risk to the world economy radiating from Europe.
'One Spectacular Step'
Euro-area government chiefs are convening for the second time in a month as they aim to break a deadlock over a new Greek rescue. While Merkel said July 19 the crisis can't be resolved in “one spectacular step,” Greek Prime Minister George Papandreou said in an interview that the summit could be a “make-or-break moment” for the euro region.
“We have found solutions to previous crises and we'll find a solution now as well,” French Foreign Minister Alain Juppe told reporters in Madrid yesterday. “A failure would be catastrophic for the euro zone.”
Reynders told Le Soir that debate at the summit will focus on how to finance the package and the role of private investors, and that “it shouldn't be difficult” to agree on a new plan.
The German government expects that the private sector will share some of the costs of aiding Greece, Finance Ministry spokesman Martin Kotthaus said yesterday.
Euro Bonds
Some officials are indicating that the only way for the crisis to be stopped is for Merkel to surrender her opposition to euro bonds. While it would help debt-strapped nations access markets, she rejects it as a step too far because it would remove pressure on governments to pursue austerity, and also risk pushing up the cost of credit for her taxpayers.
Greece's sovereign-debt crisis risks contaminating the rest of the euro region even if officials avert a default, the International Monetary Fund said. Greek Finance Minister Evangelos Venizelos will travel to the U.S. to meet with IMF Managing Director Christine Lagarde on July 25, the Athens-based Finance Ministry said yesterday.
Both the European Commission and the ECB “considered that a sovereign default or a credit event would likely trigger contagion to the core euro-area economies with severe economic consequences,” according to an IMF staff report on the region's economy released two days ago. “Staff however also saw serious risks of contagion, even under a strategy which tries to avoid default or credit events.”
Crisis Tools
European leaders are at odds with one another and with the ECB over demands by Germany and Finland that private investors bear some of the burden of a new Greek bailout.
Spain wants the EU to increase the “flexibility” of its crisis tools, including the ability to buy bonds in the secondary market, Finance Minister Elena Salgado told lawmakers in Madrid yesterday. That mirrored calls by the IMF to “scale up the capacity” of the region's rescue fund and make it more adaptable.
European officials are considering a tax on financial institutions as one possible route to help finance a second Greek bailout and avoid any kind of default, according to an EU paper obtained by Bloomberg News.
The one-page document, dated July 16, lays out three ways to construct a Greek rescue that includes the involvement of private companies. In addition to a bank tax, “Option Three” could also include a voluntary rollover of Greek debt.
The other two proposals are likely to involve some form of default, the document said.
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