Disagreement between France and Germany may prevent eurozone leaders from reaching a crucial deal on a second rescue package for Greece this weekend, a person familiar with the negotiations said Tuesday.
A common position of the two biggest eurozone economies is seen as a precondition for reaching agreement between all 17 countries in the currency union at a crisis summit on Sunday.
Investors around the world hope a comprehensive plan to fight the debt crisis, including final details on Greece's second bailout, will keep the debt turmoil from pushing the global economy back into recession. Signs that such a plan is proving slower to clinch caused markets to slide on Tuesday.
Germany is pushing for banks to accept cuts of 50 percent to 60 percent in the value of their Greek bonds, while France is insisting that leaders should only make technical revisions to a preliminary agreement reached with private investors in July, the person said.
The person was speaking on condition of anonymity because of the sensitivity of the negotiations.
The July deal would lead to losses of some 21 percent on Greek bondholdings, much of that from cuts in interest rates and deferred payments.
While that would take some pressure off Greece in the coming years, it would do little to reduce Greece's overall debt load, which is set to reach some 180 percent of economic output if the deal goes ahead, the person said.
German officials have said in recent weeks that the eurozone needed to find a solution for Greece that makes the country able to repay its debts in the long-run.
France on the other hand has been reluctant to back bigger losses for banks, since French banks are among the biggest holders of Greek government bonds.
Its position is supported by the European Commission, the EU's executive. Commission officials said last week that technical revisions to the July deal with the banks are necessary because changed market conditions had made the deal more expensive for Greece and the rest of the eurozone.
While that could imply an upward revision of the losses for banks, cuts would likely stay far below the 50 percent to 60 percent haircut pursued by the Germans.
A mere revision of the deal with the banks would allow for it to remain voluntary and avoid being seen as a hard default by Greece.
The Institute of International Finance, the big bank lobby that has been leading negotiations of the deal, has said that banks would be unlikely to voluntarily accept much bigger haircuts on bonds. Charles Dallara, the managing director of the IIF, and Deutsche Bank CEO Josef Ackermann were in Brussels Tuesday for negotiations with eurozone officials, a spokesman for the institute said in an email, without giving further details.
The second rescue package for Greece, which will also include billions of euros on loans from the eurozone, is part of a broader solution to the escalating debt crisis EU leaders have promised for this weekend. It will also include a deal to maximize the impact of the 440 billion euros ($600 billion) rescue fund and higher capital levels for banks to make sure they can sustain market turmoil.
The disagreement between France and Germany on the Greek rescue signifies a larger split between the two countries. France — which finds itself increasingly under scrutiny by worried investors — is concerned that having to help its banks suffer through Greek losses will hurt its own credit rating, while Germany seeks to limit bailout costs for its taxpayers.
Rating agency Moody's warned Tuesday that it might in the next three months start a review of France's credit worthiness, due to the country's worsened economic outlook and a growing crisis bill.
"France may face a number of challenges in the coming months — for example, the possible need to provide additional support to other European sovereigns or to its own banking system, which could give rise to significant new liabilities for the government's balance sheet," Moody's said.
The warning came as French Finance Minister Francois Baroin said that the 2012 growth estimate of 1.5 percent was "probably too high." In an interview on France-2 television, Baroin blamed the risk of a global slowdown, which he said could be "very vast" and "severe."
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