ECB, Berlin at odds over Greek bailout formula

BRUSSELS – The European Central Bank and Berlin have reached a standoff over the contribution of the private sector to a second Greek bailout package ahead of a eurozone summit on Thursday where the burning issue is to be discussed.

ECB chief Jean-Claude Trichet warned eurozone governments that the onus of funding the Greek banking sector will fall on them if they decide to opt for Greek debt solutions that lead to a selective default.

?If a country defaults, we can no longer accept as normal eligible collateral defaulted bonds issued by the government of that country,? the French banker told Financial Times Deutschland. ?The responsibility lies with the governments and they have been warned.?

ECB executive board member Lorenzo Bini Smaghi added that the private sector?s participation would cost taxpayers more, as the Greek debt is held by a few private banks that would crumble if forced to suffer the cost of a debt write-off.

German Chancellor Angela Merkel meanwhile continues to insist private sector involvement must be part of a new deal for saving Greece. ?The more significant the voluntary contribution of the private sector, the more unlikely new measures will be required,? she told German state television. She added that the eurozone meeting will need to issue a clear message of stability about Greece.

However, she appears to have a different strategy to the German Finance Ministry, which openly supports a Greek debt restructuring. The chancellor said she is neither in favor of a restructuring nor efforts in that direction, as it would signal to other countries that fiscal measures are not necessary.

French Budget Minister Valerie Pecresse said on Monday that the private sector?s participation ?is natural and fair, as everyone has to contribute.? She added that ?the point now is to reach our target without impacting eurozone stability, meaning that it should not lose its attraction for investors.?

As preparations for the summit are finalized, the two main proposals on the table are a buyback of Greek bonds at their current value, which the ECB supports, and swapping old bonds for new ones, guaranteed by the European Financial Stability Facility.

Meanwhile, German newspaper Die Welt proposed a eurozone bank levy to help Greece.

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