European Officials Shaping Greek Rescue and Effort to Aid Banks

On the second day of talks here, the ministers also said that holders of Greek bonds would have to take much bigger losses than the 21 percent originally agreed to in July, though one bank official said that despite the ministers’ consensus, no agreement was near on write-offs that could reach as high as 60 percent.

The ministers also reported that France and Germany had made progress on a third issue, how to increase the firepower of a rescue fund for the euro zone. Germany’s chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, along with other European leaders, continued negotiating later Saturday.

“I believe that now we have reached a more realistic view of the situation in Greece and that we will provide the necessary means to be able to protect the euro,” Mrs. Merkel said as she arrived at a gathering of European center-right leaders outside Brussels. The Sunday meeting would not bring final decisions, she said, adding that the leaders would take definitive steps at another scheduled meeting on Wednesday.

Despite resistance from Spain and Italy, agreement seemed close on a plan worth around 100 billion euros, or $138 billion, to recapitalize European banks. The measure is intended to help banks better withstand turmoil in the markets.

“We have laid down foundations for an agreement on the banking side,” said Anders Borg, Sweden’s finance minister.

The talks on Saturday established an improved tone over the past week, when differences between Mrs. Merkel and Mr. Sarkozy burst into the open.

But the challenge remains for leaders to construct a comprehensive and credible package of measures by Wednesday’s meeting.

Ministers were on track to ask bankers to write off around half of the value of their Greek bond holdings after a report by international lenders suggested that the economy in Greece had deteriorated so significantly that the 60 percent haircut was needed.

“We have agreed yesterday that we have to have a significant increase in the banks’ contribution,” Jean-Claude Juncker of Luxembourg, who is the head of the euro group of finance ministers, said on Saturday. He did not offer a specific figure.

But Charles Dallara, the managing director of the Institute of International Finance, which has been negotiating on behalf of the banks, said the two sides were “nowhere near a deal,” The Associated Press reported.

One remaining worry is that Greece shows few signs of returning to economic growth and, though he declined to say how much in losses banks would be willing to accept, Mr. Dallara added, “We would be open to an approach that involves additional efforts from everyone.”

Greece’s deteriorating economic outlook was the subject of intense discussions among the ministers with Germany and the Netherlands pressing their case that private investors needed to take bigger losses.

According to the international lenders’ report, a 60 percent loss for bondholders would be needed to bring Greece’s debt below 110 percent of gross domestic product by 2020. That represents a huge increase from the 21 percent losses private investors agreed to accept only three months ago.

Without action, Greece’s financing needs could amount to roughly 252 billion euros through 2020, the document said, while under a worse outlook, the needs, including rollover of existing debt, could approach 450 billion euros. The emerging comprehensive package is highly complex and involves painstaking negotiations around issues that are often linked. For example, the deal to strengthen European banks is seen as vital to protect the banks from the fallout from write-downs on Greek bonds.

The ministers agreed on Friday to release the majority of loans worth 8 billion euros to prevent Greece from defaulting. The International Monetary Fund could contribute about 2 billion euros to that fund.

The biggest area of difference between France and Germany seemed to be narrowing after France appeared to be giving ground on how to bolster the euro rescue fund.

Mrs. Merkel had firmly opposed the French suggestion that the fund, the European Financial Stability Facility, should get a banking license, which would enable it to borrow from the European Central Bank.

France’s finance minister, François Baroin, said on Friday that the issue was “not a definitive point of discussion for us,” adding that “what matters is what works.”

On Saturday, the Dutch finance minister, Jan Kees de Jager, said that use of the central bank was “no longer an option” but that two options were under consideration.

Both options involve plans to insure against a portion of losses on Italian or Spanish bonds. Under one version this insurance would be offered by the bailout fund.

The other would form an agency to buy bonds, perhaps attracting new investors like sovereign wealth funds. This would buy bonds on the primary and secondary markets using insurance offered by the bailout fund, said one official briefed on discussions but not authorized to speak publicly.

One advantage of this plan might be that it could force clearer conditions for reform on countries whose bonds are bought.

Article source: http://feeds.nytimes.com/click.phdo?i=0393bb8eea6905e5e6901fedd072c954