Proposal for bank levy to buy Greek debt

EURO CRISIS SUMMIT:GERMANY AND France will propose a multi-billion euro bank levy at this morning's summit in Brussels to guarantee private sector involvement in a second Greek rescue package

Chancellor Angela Merkel and President Nicolas Sarkozy reportedly agreed last night to merge two competing demands – for private sector involvement and a bank levy – into one proposal to seal a €110 billion Greek deal.

Over a working dinner of duck with potato pureé in Berlin last night, the leaders said they were “very confident” of agreement on a Greek package and further euro zone reforms this afternoon in Brussels.

Among other options on the table will be allowing the euro zone’s main rescue fund to lend to recapitalise banks.

This could have positive consequences for Irish public finances, which have been severely weighed down by the cost of shoring up the domestic financial sector and are likely to remain constrained for many years.

“The chancellor is very confident that we will come to a good solution and is working towards that, among others, with the French president,” said Steffen Seibert, government spokesman.

Yesterday’s hastily-arranged meeting in Berlin came after the two leaders were unable to agree a common line during a phone conversation on Tuesday.

Amid growing tensions a meeting of the “euro working group” – senior finance ministry officials – was postponed until this morning, pushing back the summit start by an hour to 1pm.

Officials worked around the clock to formulate effective proposals that will minimise market turbulence. Yesterday the European Commission proposed a €50 billion bank levy to buy back and retire a fifth of Greece’s €350 billion outstanding debt.

Commission president Jose Manuel Barroso warned there was a real risk of market contagion unless a deal was reached today.

“Nobody should be under any illusion: the situation is very serious and requires a response,” he said, calling on all actors to “exercise their responsibility”.

A second €110 billion Greek package is likely to combine €30 billion from the sale of Greek assets and a contribution from the €440 billion European Financial Stability Facility (EFSF) and the International Monetary Fund.

Reports last night that the private sector would contribute through a bank levy was greeted with alarm by leading analysts.

“It doesn’t make any sense: it’s a big mess that only politicians could come up with,” said Daniel Gros of the Centre for European Policy Studies.

“This would be a kind of collective punishment. Banks with no involvement in Greece will be asked to pay so that hedge funds get their money back.”

Banks in Germany and Austria have already threatened legal action against the prospect of a levy which, as envisaged by France, could reduce Greek debt by about €40 billion.

Taoiseach Enda Kenny is hoping today’s meeting goes beyond Greece to flesh out July 11th proposals to “enhance the flexibility and scope” of the EFSF to lower interest rates and lengthen loan maturities.

Ahead of today’s summit Germany’s economic “wise men”, who advise the federal government, urged a drastic “Plan B” for Greece: a 50 per cent write-down on debt in Greece, with an option for similar relief for Ireland and Portugal.

“The markets need a clear signal and I hope the chancellor finds a way out of the crisis,” said Prof Peter Bofinger, one of the economic “wise men”. “We think a ‘haircut’ is the sensible solution.”

To protect against rating agency shocks, the “wise men” propose combining the write-down with a swap of Greek bonds for EFSF bonds.

The European Central Bank gave a final warning yesterday of the possible dangers of restructuring Greek debt. Chief economist Jürgen Stark told the Börsen Zeitung that only a voluntary sale of Greek debt to the EFSF would prevent negative reaction by ratings agencies.