Eurozone aims for unity on Greek debt

France, whose banks have the greatest exposure to Greece, is opposed to a Greek default and supports the idea of a levy on banks to help Greece meet its debt obligations.

Germany is more ambivalent, with a panel of the country’s top economic advisers announcing earlier this week that a partial Greek default could ease the burden on the country, in part by decreasing the cost of existing state bonds – in the process decreasing the debt level from around 160 per cent of Greek GDP to 106 per cent.

Eurozone leaders are convening in Brussels for a summit on the debt crisis.

French ministers have been keen to talk up the prospects of an agreement. Finance Minister Francois Baroin said it “should allow us to take a further essential step to establish the conditions of a new package for Greece, that will make Greece’s debt more bearable”.

And speaking on French television, Foreign Minister Alain Juppe said he was “sure we will find an accord”.

But Angela Merkel was more circumspect. On Tuesday she cautioned that the summit will not produce a “spectacular” solution to resolve the debt crisis,

Nor have banks welcomed the proposal to include a bank levy as part of the latest Greek rescue package. They believe a tax on eurozone banks to raise 10bn euros a year for three years would send a wrong signal by punishing banks, regardless of their holdings.

Don’t hold your breath for a solution to the debt crisis
Angela Merkel and Nicolas Sarkozy will meet in Berlin this afternoon, as Europe’s two most powerful politicians try to get a grip on the financial crisis threatening to engulf the Continent, writes Channel 4 News Senior Economics Producer Neil MacDonald.

Leaders of the 17 countries who use the euro are meeting in Brussels tomorrow, where in theory they should agree a new bailout package for Greece. Unfortunately, the leaders have been trying to agree such a package for weeks now and have so far failed to come to any conclusions.

The dilemma is this: Greece needs to borrow billions of euros every month but can only raise this money on the private financial markets at sky-high interest rates which it can’t afford. So Greece has turned to its eurozone partners (and the IMF) to borrow the money from them.

So eurozone governments must either provide the extra cash or see Greece run out of money and default on its loans. But a Greek default would mean big losses for the European banks that lent it large amounts of money. As that could send shock waves through the world’s financial markets – in exactly the same way that the collapse of Lehman Brothers helped to trigger a world economic slowdown in 2008 – it’s clear the euro politicians will be keen to avoid it.

Unfortunately, the alternative – providing the extra cash to Greece – is hardly more acceptable to those same politicians, who fear that providing another bailout for Greece is just a case of throwing good money after bad.

So the idea which politicians are now toying with is making the private sector banks who lent all this money to Greece in the first place share some of the pain of helping to keep it afloat. It’s an appealing idea because it will mean that eurozone governments will have to contribute less.

But this plan too has its problems – because it will also mean that the private sector investors will see potential losses on their Greek loans.

So there are no pain-free solutions to this problem – and because of that, the politicians have so far failed to decide what to do. But as they have dithered, the financial markets have become increasingly concerned by the lack of leadership.

The meeting today between the French and German leaders is meant to ensure there’s some progress tomorrow. But Angela Merkel has already said that people shouldn’t expect a comprehensive solution. So don’t hold your breath.