EU leaders must find a convincing solution to Greece's debt crisis at a summit on Thursday or the global economy will pay the price, the head of the European Commission said in an unusually sombre warning.
Jose Manuel Barroso delivered the message as officials of the 17-nation currency area and bankers struggled to pin down a package of measures to persuade markets that Greece can be saved from default and the rest of the euro zone from contagion.
"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," Mr. Barroso told a news conference.
He said the elements of a solution must include: measures to ensure the sustainability of Greek public finances, private sector involvement in funding for Athens, more flexible use of the euro zone's EFSF bailout fund, repair of the region's banking system and liquidity to keep the economy going.
In what sounded like a veiled criticism of German Chancellor Angela Merkel, Europe's reluctant paymaster, Mr. Barroso said it was time for leaders to say "what they can do and what they want to do. Not what they can't do and won't do".
Ms. Merkel lowered expectations on Tuesday, saying the summit would not bring a one-shot spectacular solution to the Greek crisis but only the latest in a series of incremental steps to tackle the roots of Athens' debt and competitiveness problems.
The euro and peripheral euro zone bonds rose on hopes that the leaders would let the EFSF buy government bonds in the secondary market and provide precautionary credit lines to countries in difficulty.
However, EU paymaster Germany has so far blocked either course, and while a source close to the talks told Reuters earlier this week that both ideas were back on the table, there is no sign yet that Berlin has changed its mind.
Both would require changes in the EFSF's rules that would have to be ratified by national parliaments, and could fall foul of skeptics in Germany, the Netherlands and Finland.
They would also run counter to a treaty signed just three weeks ago creating a permanent crisis-resolution mechanism from 2013, the ESM, which would not have such powers.
Major European banks and insurers were to send euro zone governments a complex proposal later on Wednesday for helping in a Greek rescue, industry sources said.
One banking source said the banks were offering a mixture of debt rollovers, maturity extensions and other measures worth roughly €40-billion over three years, but details have yet to be finalized.
The banks are determined to fight a proposal for a tax on the financial sector to help pay for a second Greek rescue, which a euro zone working paper obtained by Reuters on Tuesday showed was seen as the least risky private sector contribution.
Banking sources said a tax would unfairly penalize banks with no exposure to Greek debt and would inevitably give rise to legal challenges.
Other mooted steps such as rolling over maturing Greek bonds, swapping existing bonds for new ones with longer maturities or buying back Greek debt in the secondary market would trigger a selective or outright default, the paper said.
Ms. Merkel and French President Nicolas Sarkozy, who conferred by telephone on Tuesday, were to meet in Berlin on Wednesday evening for what could be the decisive preparatory session before euro zone officials meet early on Thursday to thrash out details hours before the summit.
"We are very confident that there will be a good and sensible solution," Ms. Merkel's spokesman told reporters, stressing that private sector creditors' participation remained a key German priority.
French Foreign Minister Alain Juppe also said he was "sure we will find an accord", adding that contrary to media reports, "there is a very broad convergence of views" among euro zone capitals.
However, Paris also signalled apparent frustration at Berlin's continued opposition to common euro zone bonds, a step which European Socialist leaders and many economists argue would provide a long-term solution to the debt crisis.
French government spokeswoman Valerie Pecresse said after a cabinet meeting that "German reticence" was the main obstacle to the idea of issuing joint euro bonds.
Despite Wednesday's cautious market optimism, many analysts fear the fifth European summit this year will produce half-measures that, at most, will buy a couple of months before pressure for a Greek debt restructuring becomes acute again.
The European Central Bank kept up a drumbeat of pressure on euro zone leaders to avoid any step that could cause a selective Greek default, which the ECB has warned would force it to refuse Greek bonds as collateral for bank refinancing.
ECB chief economist Juergen Stark said in a newspaper he hoped the leaders would stick to a previous commitment to avoid a selective default, because anything else would confuse markets.