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Greece’s debt time-bomb is ticking down: Maley

It’s a nail-biting time for markets, as investors wait to see whether this evening’s emergency summit of eurozone leaders will finally be able to hammer out some sort of solution to stem the long-running Greek debt crisis. German chancellor Angela Merkel forced herself to strike an optimistic note overnight. According to French newspaper Le Monde, […]
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It’s a nail-biting time for markets, as investors wait to see whether this evening’s emergency summit of eurozone leaders will finally be able to hammer out some sort of solution to stem the long-running Greek debt crisis.

German chancellor Angela Merkel forced herself to strike an optimistic note overnight. According to French newspaper Le Monde, Merkel said she was “very confident” the summit would be successful and that she expected to find common ground with French President Nicolas Sarkozy.

French finance minister François Baroin was also reassuring, saying there was a broad agreement among eurozone members over the latest Greek rescue plan. “There is an agreement on the fundamentals, there is a common desire to make Greece’s debt more sustainable, and there are still some discussions on the role of the private sector,” he said in an interview on French radio.

But it’s this very issue – the role of the private sector in the latest Greek bailout – that has sorely tested the relationship between France and Germany in recent weeks. In a bid to resolve their differences ahead of the important summit, Sarkozy flew to Berlin overnight for a last-minute meeting with Merkel. Jean-Claude Trichet, head of the European Central Bank, also joined in the talks.

It had become clear that a face-to-face meeting between Sarkozy and Merkel was necessary after the two had failed to reach a compromise during a conference call on Tuesday on how to ensure that private sector bond holders – such as banks, insurance companies and pension funds – were part of the latest €120 billion Greek bailout.

Germany, backed by the Netherlands and Finland, is insisting that the private sector should contribute around €15 billion towards the latest bailout. At present, an estimated €100 billion of Greek bonds are held by private investors.

But the European Central Bank has warned that forcing the private sector to participate would trigger a Greek default, and that it will not be able to accept defaulted Greek bonds as security for loans. Given that the Greek banks are heavily dependent on the ECB for funding, this could lead to a collapse in Greece’s banking system. The ECB is also worried that a Greek default would undermine the euro’s credibility, and would fan contagion to other debt-laden eurozone countries. France, which has backed the ECB position, is now proposing a bank levy as a way of forcing the private sector to participate, without triggering a default. This tax could raise around €10 billion a year, or €50 billion over five years.

Ahead of today’s meeting, the European Commission has circulated a rescue plan for Greece that would see the country receive €71 billion in fresh funding from the eurozone and the International Monetary Fund, combined with a €50 billion tax on eurozone banks. The money raised by this tax would be used to buy back Greek bonds, which would reduce Greece’s debt burden. The plan also canvasses the possibility of a bond exchange program under which private sector lenders to Greece would swap debt that matures in the next eight years for new 30-year bonds.

The EC rescue plan also entails expanding the powers of the eurozone’s existing €440 billion bailout fund, to enable the fund to buy back Greek bonds in secondary markets. In addition, the bailout fund would also be able to extend lines of credit to countries that find themselves in financial strife. But this would require re-writing the rules for the bailout fund, and Berlin has little enthusiasm for the changes.

Meanwhile, Merkel and Sarkozy are under intense pressure to reach a compromise. Overnight, EC president, José Manuel Barroso, warned of the dire consequences if tonight’s summit fails to reach agreement on the way forward. “Nobody should be under any illusion: the situation is very serious. It requires a response. Otherwise the negative consequences will be felt in all the corners of Europe and beyond.”

This article first appeared on Business Spectator.