Germany and France have reached a deal to reduce Greek debt ahead of a critical EU summit. Sources have said the draft agreement has ruled out a tax on banks but could trigger a Greek default.
Merkel and Sarkozy previously differed on how best to help
The agreement reached between Berlin and Paris late on Wednesday appears to have eased tension at Thursday's critical summit on eurozone debt crisis.
Chancellor Angela Merkel met with French President Nicolas Sarkozy on Wednesday evening to thrash out some of the two countries' differences on the issue.
During the seven hour talks, the two leaders have apparently agreed to no longer rule out the possibility of a Greek debt default.
The leaders also reportedly dropped the idea of a tax on banks, to fund a second Greek bailout, suggesting instead a bond buy-back plan to levy a private sector contribution.
But anonymous sources in Brussels suggest that any change to the terms of outstanding Greek sovereign bonds could prompt rating agencies to declare Athens in default.
"Some of the solutions could be interpreted by the credit ratings agencies as a default of payments," one unnamed diplomat told news agency AFP.
But as eurozone leaders began to arrive at the emergency summit in Brussels, they offered assurances that all necessary measures would be taken to prevent the debt crisis spreading through Europe.
"I expect that we will be able to seal a new Greece programme. This is an important signal. And with this programme we want to grasp the problems by their root," Angela Merkel told reporters.
Luxembourg prime minister and head of the Eurogroup of finance ministers, Jean-Claude Juncker, added "We cannot exclude any possibility, but everything should be done to prevent (a Greek default.)"
No illusions over risks
Barroso raised the already high stakes further
Thursday's emergency summit primarily aims to hammer out the details of a second package of international emergency loans for Greece.
Prior to the meeting, European Commission President Jose Manuel Barroso left no doubt about the severity of the crisis.
"Nobody should be under any illusion, the situation is very serious. It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond," Barroso told reporters at a press conference in Brussels.
Barroso said his minimum target for the summit was to reach a consensus on Greece, on possible private sector involvement in any rescue package, on the situations when the euro rescue fund can be employed, and on ways to further protect the banking sector.
"The euro is one of our greatest assets, its benefits far outweigh the efforts that are required by member states on the different sides of negotiation. We cannot be light about this, or else history will judge this generation of leaders harshly," Barroso said.
The situation in Greece does not seem to be improving
An agreement between France and Germany is vital for securing any EU deal, but the two countries have different in their responses to the crisis.
This prompted Angela Merkel and Nicolas Sarkozy to hold the hastily-arranged working dinner in Berlin on Wednesday evening to seek a common position ahead of the summit.
"Germany and France must agree. If this does not happen, Europe cannot advance," Merkel's spokesman Steffen Seibert said ahead of the tete-a-tete.
In recent weeks, Germany led the push for private sector involvement - along with other relatively wealthy northern European countries like Finland and the Netherlands - to ask private sector investors and speculators to lend a hand with any second Greek rescue. This would most likely involve them voluntarily agreeing to an extension of the repayment deadline for Greek sovereign bonds in their possession.
Sarkozy had previously maintained that involving the private sector would be construed as a Greek default and was therefore unacceptable.
Author: Charlotte Chelsom-Pill (AFP, Reuters)
Editor: Ben Knight