Eurozone set for Greek deal; bank levy unlikely

[July 21, 2011]  BRUSSELS (AP) -- European leaders are poised to sign off on a second bailout for Greece Thursday even at the potential cost of putting the country into default, a top eurozone official said Thursday.

After Germany and France shelved a plan to levy a tax on the banks, investors are worried that an alternative way of getting banks involved in the second bailout of Greece will prompt credit rating agencies to slap a default rating on Greece. The worry is that plans to give Greece more time to repay its bonds to banks and other private investors could potentially threaten Greece's banking system and spark renewed concerns that much bigger economies such as Spain and Italy will get dragged into Europe's debt crisis mire.

By early afternoon, the euro was down 0.8 percent at $1.4150, having traded above $1.42 before Jean-Claude Juncker, the prime minister of Luxembourg who as the chairman of the Eurogroup is also one of the key officials of the currency union, conceded that the final deal could well be regarded as a "selective default" by rating agencies.

In the run-up to the meeting, there had been hopes that Greece would avoid a default rating. An options paper circulated among the eurozone's top financial advisers earlier this week included plans to levy a tax on banks to recoup some of the money the eurozone will have to spend on a second rescue package for Greece. However, the levy would also have targeted banks that don't hold any Greek debt and did not survive a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy Wednesday night.

"I have the impression that there is no agreement on a banking tax," Juncker said.

Over the past few weeks, Germany has been at the forefront of initiatives to get the banks to agree to change the terms of their Greek debts. Merkel said Thursday that a new Greek deal would "address (Greece's) problems really at the root" -- namely by making the country's debts more sustainable and helping restore its competitiveness.

An agreement became more tangible after Merkel and Sarkozy, the leaders of the eurozone's two biggest economies, agreed on a common position on how to get banks and other investors to share the burden during last-ditch talks in Berlin Wednesday. Merkel said the two leader listened closely to the concerns of European Central Bank President Jean-Claude Trichet, who joined them for part of the meeting.

Trichet has threatened to cut Greek banks off the ECB's liquidity support operations by not accepting Greek government bonds rated as "selected default" as collateral.

The options for private creditor involvement that circulated among top eurozone advisers earlier this week sought to address such a move by the ECB by considering alternative support measures for Greek banks from the eurozone.

On top of the contribution of the private sector, a new deal for Greece and the wider eurozone could also see changes to the eurozone's bailout fund.

Bailed out states should find loan conditions that they can actually afford, Austrian Chancellor Werner Faymann said as he arrived in Brussels. That would imply longer repayment deadlines for the eurozone bailout loans as well as lower interest rates.

However, Faymann warned that while moving ahead on a Greek deal, Thursday's summit won't solve the wider problems of the currency union.

"Ultimately the euro is as stable as the weakest link in a chain," he said.

[Associated Press; By GABRIELE STEINHAUSER]

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