The euro sculpture is seen in front of the European Central Bank in FrankfurtMICHAEL PROBST/The Associated Press
A split has opened in the euro zone over the terms of Greece's second €109-billion ($148-billion U.S.) bailout with as many as seven of the bloc's 17 members arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, according to senior European officials.
The divisions have emerged amid mounting concerns that Athens' funding needs are much bigger than estimated just two months ago. They threaten to unpick a painfully negotiated deal reached with private sector bond holders in July.
While hardliners in Germany and the Netherlands are leading the calls for more losses to be imposed on the private sector, France and the European Central Bank are fiercely resisting any such move. They fear reopening the bond deal could spark renewed selling of shares in European banks, which have significant holdings of Greek and other peripheral euro zone debt.
Shares in French banks have rallied in recent days following signs that euro zone officials are preparing to increase the financial firepower of the bloc's €440-billion bailout fund, which could within months be able to inject capital into euro zone banks and purchase sovereign bonds.
On a visit to Berlin, George Papandreou, the Greek Prime Minister, urged Germans to recognize the "superhuman effort" his country was making to impose drastic austerity measures in a deepening recession. "I can guarantee that Greece will live up to all its commitments," he said.
Senior European officials said there was significant division over the move to reopen the bondholders' deal, which could trigger a bigger and earlier restructuring of Greek debt. Even within Germany, officials are split over whether to press for a bigger "haircut" for private sector creditors.
"In Germany, there are the hardliners and there are the moderates," said one senior European official. "This is the hardliners' stance."
Because of the recent economic downturn and Greece's slow implementation of austerity measures, officials estimate Athens' funding needs over the next three years have grown beyond the €172-billion forecast this summer. The scale of the shortfall will be determined by international lenders over the next few weeks.
Berlin has long wanted bondholders to make a bigger contribution to a new bailout, a point reiterated publicly in recent days by Wolfgang Schäuble, Germany's Finance Minister.
German insistence has recently intensified, according to people briefed on the talks. Euro zone finance ministers had originally hoped to sign off on the next aid tranche to Greece on Monday, but a decision is now expected to delay the next €8-billion payment until an emergency meeting in two weeks.
Berlin is expected to back the disbursement eventually. But a senior official said some German policy makers then want the banks to take a larger haircut on their bond holdings or renegotiate bond swaps, reflecting the sharp fall in Greek bond values since July.
Under the terms of the July bailout, bondholders agreed to trade about €135-billion in bonds that come due through 2020 for new, European Union-backed bonds that would not be repaid for decades. This deal implied a haircut of 21 per cent for bondholders, but many German officials say they were forced to agree a deal that was too beneficial for the banks.
On Tuesday, euro zone banks and German and French stock markets had their biggest gains since the first Greek bail-out was unveiled in May, 2010.
France's Société Générale surged 17 per cent, BNP Paribas was up 14 per cent and Crédit Agricole gained 13 per cent while the broader euro zone bank sector increased 9 per cent. BNP and SocGen shares have now risen by a third in the past three days.