A meeting of euro zone leaders on Thursday will not be the final step in the resolution of Greece’s debt crisis, German Chancellor Angela Merkel said on Tuesday.
“There are other necessary steps to take and not one spectacular result that will solve all problems,» she said at a joint news conference with Russian President Dmitry Medvedev.
A tax on euro zone banks and cheaper, longer-dated official loans are the least risky way to provide extra funding for debt-stricken Greece, a confidential paper drafted ahead of a European summit showed on Tuesday.
With financial markets on edge two days before leaders of the 17-nation currency area hold a crucial meeting, other options that could trigger a selective or outright Greek default with far reaching consequences remain on the table, the paper obtained by Reuters showed.
The European currency is facing the biggest crisis of its 12-year existence, with contagion threatening major economies such as Italy and Spain after three small members — Greece, Ireland and Portugal — needed financial rescues.
Eurozone leaders will try to agree on a second rescue package for Greece and a strategy to halt contagion when they meet in Brussels on Thursday, after senior officials thrash out detailed proposals in talks on Wednesday.
A source familiar with the talks said a small levy on banks could raise 10 billion euros a year, yielding the 30 billion euros over three years targeted by Germany, which has led the drive for private sector involvement in a new Greek program.
A tax would appear to have the drawback of lumping together banks that have an exposure to Greece and those that do not, but the source said it could be structured so that the main burden fell on those with Greek holdings. He did not say how.
ECB President Jean-Claude Trichet warned again this week that the central bank would not accept Greek government bonds as collateral to obtain liquidity in such circumstances, forcing eurozone governments to rescue Greek banks.
Another ECB policymaker, Ewald Nowotny of Austria, appeared to offer a glimmer of flexibility, saying a solution could depend on the duration of a selective default, but it was unclear whether he spoke for others on the central bank’s governing council.
“There are some proposals that deal with a very short-lived selective default situation that would not really have major negative consequences,» Nowotny told CNBC in an interview broadcast on Tuesday.
The eurozone paper said other options such as an EU-funded Greek government buy-back of its own debt on the secondary market, a German-proposed bond swap for longer maturities and a French plan for a voluntary rollover of maturing Greek debt would all generate additional costs for official lenders.
In those scenarios, euro zone governments would have to provide billions of euros to recapitalise Greek banks and provide them with collateral to obtain ECB funding, it showed.
A buy-back of Greek debt would do most to reduce Athens’ debt mountain — now close to 160 percent of annual economic output — and make it more sustainable.
But it would also be the most costly option for the public purse, requiring billions of euros in additional euro zone loans on top of support for Greek banks and ECB collateral, the paper showed.
Another EU source said the outcome on Thursday was likely to be a mix of several options, with a bank tax, some form of debt swap and substantial extra loans to Greece from the euro zone’s EFSF rescue fund.