German Chancellor Angela Merkel and French President Nicolas Sarkozy, the eurozone’s key players, agreed on a “common position” after late-night talks in Berlin just hours before the summit in Brussels, the French president’s office said.
European Central Bank president Jean-Claude Trichet took part in the meeting.
Officials refused to provide any details but the Franco-German agreement will lay the groundwork for negotiations between the eurozone’s 17 leaders after weeks of debate over how to put a lid on the year-long debt crisis.
On the eve of the summit, the European Commission president Jose Manuel Barroso issued a dire warning that failure to find a solution could have global repercussions.
“Nobody should be under any illusion – the situation is very serious,” Barroso warned on Wednesday. “It requires a response. Otherwise the negative consequences will be felt in all corners of Europe and beyond.”
French Foreign Minister Alain Juppe also warned of the stakes involved, saying, “We absolutely must find a solution in order to end international speculation and stabilise the eurozone … If this eurozone collapses it would be a disaster.”
Nervous financial markets are keenly awaiting the outcome of the summit following several tumultuous days, with debt crisis contagion threatening to engulf Italy and Spain, the eurozone’s third and fourth-largest economies.
Merkel had unsettled markets on Tuesday by downplaying expectations that the Brussels get-together would result in something “spectacular” to end Europe’s problems in one fell swoop.
“Today’s summit could provide the last chance for eurozone policy makers to get a grip on the region’s debt crisis,” said the research firm Capital Economics. “Anything other than a very decisive response could see the situation become irretrievable,” it said.
The European Union and the IMF provided a €110 billion bailout to Greece last year, but this has proved to be insufficient. Since then, Ireland and Portugal received their own multi-billion-euro rescues.
Berlin has been at odds with the ECB and Paris over Merkel’s demands for private investors to shoulder some of the burden for the second Greek rescue, which will be the eurozone’s fourth bailout.
There are concerns that any change to the terms of outstanding Greek sovereign bonds could prompt rating agencies to declare Athens in default, with potentially dramatic consequences.
Several options are now on the table, including a Greek bond swap to cut the country’s debt by €90 billion and a special bank tax to raise another €50 billion, said a source familiar with the discussions.
The swap plan would offer financial incentives to Greece’s private creditors, banks, insurers and other investors, in order to encourage them to exchange holdings maturing over the next eight years for new 30-year bonds.
The idea would be to give Athens time to revive its economy and clean up its public finances while reducing a debt mountain, which has reached €350 billion.
The new rescue package would also include loans from eurozone nations and the IMF to the tune of €71 billion, with longer maturities and more affordable interest rates, the source said.
On Wednesday, a senior panel advising the German government said it supported a bond buy-back, along with a substantial “haircut” on Greek debt. Merkel’s spokesman said only she had “taken note.”