Dark clouds pass over a semi-sunlit Parthenon temple atop the ancient Acropolis Hill in Athens.PETROS GIANNAKOURIS/The Associated Press
Government officials and commercial bankers remained divided over competing policy proposals on Monday as Europe struggled to put together a second bailout for Greece and prevent the region's debt crisis from spreading.
French government spokeswoman Valerie Pecresse said she believed a summit of the euro zone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a €110-billion bailout launched in May last year.
But after three weeks of preparatory talks, it was unclear whether a consensus could be reached on a way for private owners of Greek government bonds - banks, insurers and other investors - to contribute to the bailout by taking cuts in the face value of their holdings.
Fears that the rescue might fail, leading eventually to a disorderly debt default by Greece, pushed the euro down against other currencies while the government bond yields of highly-indebted euro zone states rose. Italy's 10-year yield climbed 0.2 percentage point to a euro-era high.
Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing fast.
"I'm afraid to hope. I still hope, yes, but I'm not optimistic," he said.
"We've had solutions in the past, but we haven't grasped them. Now it's too late for some of those solutions to work any more; the opportunity has been lost."
Officials are wrestling with a range of proposed schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a voluntary buy-back or swap of Greek bonds, or possibly both. The schemes would be conducted at a discount to the bonds' face value, helping to reduce Greece's €340-billion euro mountain of sovereign debt.
But all of the schemes could face technical and legal obstacles, in some cases requiring the approval of national parliaments in the euro zone. Other proposals still appear to be on the table; Germany's Die Welt newspaper reported that governments were considering a levy on banks as a way to involve private creditors in rescuing Greece.
An official of a major euro zone government who is familiar with the talks said he had not heard of a proposal for a bank levy, but added: "There are at the moment so many proposals that you cannot rule out anything."
An official European Union source told Reuters that it was likely the EFSF would be used to lend money to Greece to buy back its own bonds. But this by itself would not nearly be enough to solve the problem.
Guntram Wolff, deputy director of the Bruegel think tank and until earlier this year a senior economist at DG Ecfin, the European Commission unit handling the crisis, said a buy-back might cut Greece's debt by as little as €20-30-billion.
Analysts have estimated the debt would have to be roughly halved, to 80 per cent of gross domestic product, to make it manageable in the long run.
A bond swap might have more impact but Wolff said he did not think Europe was close to agreeing on a large-scale swap. German insurance giant Allianz, for example, has suggested that private investors write off 25-30 per cent of their Greek debt via a swap, German media reported; the market prices of many Greek bonds are now near half of face value.
"What we're talking about down the road is the need for a massive reduction in the debt burden and they are just not ready to do that yet," Mr. Wolff said.
"It will require some form of substantial debt restructuring and you have to see who is going to take the hit, will it be the taxpayers or will it be the banks? To carry out such a move you need to prepare, and they don't have the time to prepare before Thursday."
German Chancellor Angela Merkel said on Sunday that while this week's summit was "urgently necessary," she would only attend if lower-ranking officials had already prepared a clear rescue plan. "I will only go there if there is a result."
As part of the second bailout, officials have also been looking at other measures to help Greece including up to €60-billion of additional emergency loans from European governments and the International Monetary Fund; steps to recapitalize Greek and European banks; and ways to stimulate Greek economic growth.
The EU source said there was a basic agreement on extending the maturities and lowering the interest rates for bailout loans extended to Greece, Ireland and Portugal.
But Mr. de Grauwe said the mood of financial markets was now so negative that such a step might not help weak euro zone states regain the ability to fund themselves.
"If that was to be a solution, it's a solution we should have implemented months ago, when it would have worked."
There has also been talk of expanding the €750-billion bailout facility which the EU and the IMF created last year as the debt crisis erupted. The EU source said there probably would not be enough time to agree on the idea this week.
Another concern is that the IMF and other major governments around the world, which want to prevent the European crisis from poisoning debt markets globally, might lose patience.
Die Welt quoted unnamed diplomatic sources as saying the IMF was angered by Europe's crisis management and that "influential parties" in the Fund wished not to take part in further bailouts of Greece. It did not elaborate.
U.S. Treasury Secretary Timothy Geithner said on Monday that Europe had to act more forcefully to contain risks in its banking sector, which is heavily exposed to Greek, Irish and Portuguese sovereign debt.
Former U.S. Treasury Secretary and White House adviser Lawrence Summers, writing in a column contributed to Reuters on Sunday, said Europe should move much more aggressively than it had done so far to prevent the Greek crisis from damaging both the region's single currency and the global economic recovery.
He recommended steps including sharp cuts in interest paid on bailout loans, allowing countries to buy European Union guarantees for their issues of new debt, and a menu of options for private investors to become involved.
"It is to be hoped that European officials can engineer a decisive change in direction but if not, the world can no longer afford the deference that the IMF and non-European G20 officials have shown towards European policy makers over the last 15 months," Mr. Summers wrote.
Many economists think some form of regional guarantee for countries' debt along the lines suggested by Mr. Summers - or perhaps even the issuance of joint euro zone bonds - may ultimately be the only way to emerge from the crisis without one or more weak states being forced out of the bloc.
But Germany has shown no appetite for such a solution, which in any case would require a complex revision of the EU treaty.
"We are against euro bonds," German government spokesman Steffen Seibert said on Friday, repeating Berlin's concern that a common bond would provide no meaningful incentives for national governments to pursue prudent policies.