Merkel and Sarkozy thrash out last-minute compromise over Greece

German and French government sources say countries’ leaders have agreed compromise on losses private creditors are to take Germany and France struck a deal early on Thursday morning intended to rescue Greece and the euro from financial ruin. After six hours of talks in Berlin prior to a crucial summit in Brussels, Chancellor Angela Merkel and President Nicolas Sarkozy agreed a compromise on the losses that Greece’s private creditors are to take, in a complex new bailout for Athens, German and French government sources said. Jean-Claude Trichet, the president of the European Central Bank, who has been Merkel’s most vocal opponent in the wrangling over how to respond to the euro crisis, rushed to Berlin late on Wednesday night to take part in the negotiations. No details of the pact were revealed. But senior officials at the European commission in Brussels disclosed that a compromise was in the air to save Greece and halt contagion by levying a tax on banks in the eurozone – opposed by Berlin and proposed by Paris – as well as a long-term Greek debt rollover stretching for decades, and other measures aimed at reducing Greece’s crippling debt level. It appeared that the multi-pronged formula would inexorably lead to Greece being deemed to be in sovereign default, at least temporarily. The last-minute deal, following a telephone dispute between the two leaders on Tuesday, is to be put to the heads of the European commission, council and central bank this morning before an emergency summit of the 17 leaders of single-currency countries. The Brussels summit – the 10th time in 18 months that European leaders will have tried to save the euro and Greece from collapse – is being staged amid grave pessimism that politicians will be able to bury their differences and combine to rescue the single currency. It remained to be seen if the Franco-German compromise would win the support of other leaders and would go far enough to satisfy the financial markets. Amid a febrile mood and an ominous sense that the euro was facing a make-or-break moment, an unusual hush descended on the key European capitals on Wednesday. It was as if leaders and officials had been struck dumb by the weight of the responsibility bearing down on them. The silence was broken only by José Manuel Barroso, the president of the European commission, who chastised the current crop of EU leaders, declaring that “history will judge this generation of leaders harshly” if they refuse to act decisively in the euro’s darkest hour. The emergency summit brings together the 17 government leaders of the eurozone, plus the heads of the European Central Bank, the commission, and Christine Lagarde, until recently French finance minister and the new head of the International Monetary Fund. The main challenge is to forge a pact that will reduce Greece’s crippling level of debt. The fundamental issue is who pays for that. On Wednesday night, the Germans insisted that Greece’s private creditors pick up a large part of the tab, the main dispute with Sarkozy and Trichet. The markets are more than jittery, and Washington is nervous. President Barack Obama intervened on Tuesday by phoning Merkel. “Might this meeting finally bring an end to the farce surrounding the euro area’s response to Greece?” said Daiwa Capital Markets. “No chance.” Amid growing calls from Washington, the IMF, and the markets for a radical step towards eurozone fiscal union as the only hope of saving Greece from default and inoculating the euro, the Germans exasperated many by pooh-poohing such notions. “I know there’s a great longing for a big decision, proposals for eurobonds, a big restructuring [of Greek debt], for a transfer union, and much besides,” said Merkel on Tuesday. “I will not give in to this. The government will not give in to this.” Greece was granted a €110bn (£97bn) bailout in May last year, since when its debt has soared to €340bn, nudging 160% of gross domestic product and rising. It needs a second bailout of a similar size to keep afloat until 2014. New suggestions this week from France are to impose a levy on eurozone banks, raising €10bn a year. This is problematic. It would take time to establish, would penalise banks not exposed in Greece, would exempt non-eurozone banks lending to Greece, and would run into political opposition in national legislatures. The advantage is it would impose private creditor involvement without seeing Greece declared to be in default. Other options are lower interest rates on loans to Greece, debt rollovers or swapping bonds for longer maturities, using the €440bn eurozone bailout fund. The talk in Brussels last night was of a combination of rollover, bank levies, and haircuts that could cut Greece’s debt by about a quarter. The reported Berlin pact was believed to be a mixture of the various options. “What cocktail will they make out of all this?” said a senior commission official. “The real priority is that they produce a cocktail that everyone can drink.” The major challenge was to finesse the complex package in a way that does not trigger declaration of Greek default by the international ratings agencies. That looked unlikely. The ECB is warning it will refuse to accept defaulted bonds as collateral from Greek banks in return for liquidity to keep them afloat. The eurozone taxpayer, in the form of the European financial stability facility, would then need to step in to save the Greek banks or risk a wider European banking crash. T he crisis has been compounded in the past fortnight by Italy, whose borrowing costs are also now close to unsustainable. “Either we act as Europe, or we are not actors at all,” warned Barroso. “The situation is very serious. It requires a response. Otherwise the negative consequences will be felt in all corners of Europe and beyond. Leaders need to come to the table saying what they can do and what they want to do and what they will do. Not what they can’t do and won’t do.” Euro European monetary union European commission Currencies European Union Angela Merkel Europe Nicolas Sarkozy Greece Ian Traynor guardian.co.uk

Posted by on July 20, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.