BERLIN/BRUSSELS (Reuters) – The European Central Bank (ECB) is willing to let Greece slip into temporary default as part of a crisis response that would involve a bond buyback but no new tax on banks, EU sources said on Thursday.

German Chancellor Angela Merkel and French President Nicolas Sarkozy crafted a common position on a second Greek bailout in late night talks in Berlin with ECB President Jean-Claude Trichet, sources in both governments said.

Minds have been concentrated by the danger Europe’s debt crisis could engulf the much bigger economies of Spain and Italy. Greece, Portugal and Ireland have already succumbed.

Merkel told reporters on arrival in Brussels for a crucial euro zone summit: “I expect that we will be able to seal a new Greece programme. This is an important signal. And with this programme we want to grasp the problems by their root.”

She gave no details but Dutch Finance Minister Jan Kees de Jager said a short-term or selective default for Greece, previously opposed by the ECB, was now a possibility

“The demand to prevent a selective default has been removed,” he told the Dutch parliament.

Euro zone sources said a buyback of discounted Greek bonds to help reduce Athens’ crippling debt pile was now seen as the most promising way of making private investors contribute to the cost of a second financial rescue.

BERLIN/BRUSSELS, July 21 (Reuters) – Germany and France have ruled out a bank tax after reaching a common position on a second bailout of Greece to prevent the country’s debt crisis spreading through Europe, EU sources said on Thursday.

The accord came after seven hours of talks late into Wednesday night between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Berlin, sources in both governments said.

European Central Bank President Jean-Claude Trichet joined Merkel and Sarkozy for part of their talks and one source said their agreement, kept secret to avoid offending other euro group leaders at a summit on Thursday, had his blessing.

“You should assume that there will not be a banking tax,” the source told Reuters.

Another source involved in preparatory talks for the emergency summit of the 17-nation currency area confirmed that the banking tax proposal, raised last week, had been dropped.

While few details of the Franco-German deal emerged, the sources said it would include private sector involvement that should not cause either a default or selective default of Greek debt, a red line for the ECB. [ID:nLDE76K0GQ]

The risk premium investors demand to hold peripheral euro zone government bonds rather than benchmark German Bunds fell on Thursday on news of the Franco-German agreement.

BERLIN/BRUSSELS (Reuters) – Germany and France have ruled out a bank tax after reaching a common position on a second bailout of Greece to prevent the country’s debt crisis spreading through Europe, EU sources said on Thursday.

The accord came after seven hours of talks late into Wednesday night between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Berlin, sources in both governments said.

European Central Bank President Jean-Claude Trichet joined Merkel and Sarkozy for part of their talks and one source said their agreement, kept secret to avoid offending other euro group leaders at a summit on Thursday, had his blessing.

“You should assume that there will not be a banking tax,” the source told Reuters.

Another source involved in preparatory talks for the emergency summit of the 17-nation currency area confirmed that the banking tax proposal, raised last week, had been dropped.

While few details of the Franco-German deal emerged, the sources said it would include private sector involvement that should not cause either a default or selective default of Greek debt, a red line for the ECB.

The risk premium investors demand to hold peripheral euro zone government bonds rather than benchmark German Bunds fell on Thursday on news of the Franco-German agreement.

BRUSSELS/FRANKFURT, July 20 (Reuters) – EU leaders must find a convincing solution to Greece’s debt crisis at a summit on Thursday or the global economy will pay the price, the head of the European Commission said in an unusually sombre warning.

Jose Manuel Barroso delivered the message as officials of the 17-nation currency area and bankers struggled to pin down a package of measures to persuade markets that Greece can be saved from default and the rest of the euro zone from contagion.

“Nobody should be under any illusion: the situation is very serious. It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond,” Barroso told a news conference.

He said the elements of a solution must include: measures to ensure the sustainability of Greek public finances, private sector involvement in funding for Athens, more flexible use of the euro zone’s EFSF bailout fund, repair of the region’s banking system and liquidity to keep the economy going.

In what sounded like a veiled criticism of German Chancellor Angela Merkel, Europe’s reluctant paymaster, Barroso said it was time for leaders to say “what they can do and what they want to do. Not what they can’t do and won’t do”.

Merkel lowered expectations on Tuesday, saying the summit would not bring a one-shot spectacular solution to the Greek crisis but only the latest in a series of incremental steps to tackle the roots of Athens’ debt and competitiveness problems.

The euro and peripheral euro zone bonds rose on hopes that the leaders would let the EFSF buy government bonds in the secondary market and provide precautionary credit lines to countries in difficulty.

BRUSSELS/HANOVER, Germany (Reuters) – German Chancellor Angela Merkel, Europe’s reluctant paymaster, doused expectations of any comprehensive solution to Greece’s debt crisis at an emergency euro zone summit on Thursday.

“Further steps will be necessary and not just one spectacular event which solves everything,” Merkel told a joint news conference on Tuesday with visiting Russian President Dmitry Medvedev.

The widespread longing for a single, final solution to make the Greek crisis disappear once and for all was unrealistic, she said, as officials wrestled with complex options for involving private bondholders in a second financial rescue for the debt-stricken euro zone state.

The euro eased against the dollar after the German leader said too high demands had been placed on Thursday’s talks, which was only part of an incremental series of steps to address Greece’s debt and competitiveness problems.

The European currency area 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 bailouts.

A confidential paper drafted ahead of the 17-nation summit and obtained by Reuters showed that a tax on euro zone banks and cheaper, longer-dated official loans would be the least risky way to provide extra funding for debt-stricken Greece.

With financial markets on edge two days before the crucial meeting, other options for private sector involvement that could trigger a selective or outright Greek default with far-reaching consequences remain on the table, the paper showed.

BRUSSELS, July 19 (Reuters) – 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 holding their breath 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. [ID:nLDE76I0JA]

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 peripheral members – Greece, Ireland and Portugal — needed financial rescues.

Euro zone leaders will try to agree on a second rescue package for Greece and a strategy to prevent contagion when they meet in Brussels on Thursday, after senior officials thrash out detailed proposals in talks on Wednesday.

French European Affairs Minister Jean Leonetti confirmed late on Monday that euro zone officials were eyeing a bank tax to raise extra money to help Greece, which needs a further 115 billion euros in funding by mid-2014 on top of a 110-billion-euro EU/IMF bailout agreed last year.

“It’s one of the solutions we are looking at. It would have the advantage of not making us intervene directly with the banks and therefore potentially not triggering a default,” he told reporters in Brussels. [ID:nLDE76H1GY]

The tax idea “deserved to be studied”, he said.

BRUSSELS (Reuters) – Euro zone officials examined three broad options for securing the private sector’s involvement in a second bailout package for Greece during a teleconference last week, a document obtained by Reuters showed.

The document, an options paper dated July 16, is part of the euro zone’s urgent efforts to secure sufficient financing for Athens for the next three years and put and end to market concern about the sustainability of debt in other euro zone countries, like Italy and Spain.

Euro zone leaders will discuss the second Greek bailout on Thursday.

The options outlined in the paper in a tabular form examine the interplay of various factors in the second financing package for Greece, depending on the type of private sector involvement.

The factors include impact on Greek credit ratings, how much money would be required from the euro zone’s EFSF bailout fund, whether it would entail lower interest rates on EFSF loans and their extended maturity and Greek debt sustainability.

The first option was a buy-back of Greek debt and public sector credit enhancement. It would likely cause a downgrade of Greek debt to selective default or default by ratings agencies.

The paper did not spell out what form of credit enhancement, which is a way to improve creditworthiness, was under consideration.

BRUSSELS/PARIS (Reuters) – European governments and banks struggled to reconcile competing proposals for a second bailout of Greece on Monday, three days before leaders meet to prevent the crisis from spreading through the region.

The euro zone summit scheduled for Thursday in Brussels is likely to agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year, a French government spokeswoman said.

But after three weeks of preparatory talks, it was unclear how a consensus could be reached for private owners of Greek government bonds — banks, insurers and other investors — to contribute by taking cuts in the face value of their holdings.

Imposing a small tax on all euro area banks is under active consideration as a possible alternative to more risky forms of private sector involvement, a source familiar with the talks said, confirming a German media report.

The source also said officials were considering ways to prevent fallout from the crisis from damaging global markets.

Fears of a chaotic Greek debt default pushed the euro down against other currencies. Bond yields of highly indebted euro zone governments rose. Italy’s 10-year yield climbed more than 0.2 percentage point to a euro-era high.

Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing quickly.

BRUSSELS (Reuters) – Confusion over competing policy proposals reigned among officials and bankers on Monday as Europe struggled to put together a second bailout of Greece and prevent the region’s debt crisis from spreading.

French government spokeswoman Valerie Pecresse said she believed a summit of the euro zone’s 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year.

But after three weeks of preparatory talks, it remained unclear whether government officials and commercial bankers could agree on a way for private owners of Greek government bonds — banks, insurers and other investors — to contribute to the bailout by taking cuts in the face value of their holdings.

The uncertainty pushed the euro down against other currencies on Monday and the government bond yields of indebted euro zone states rose, with Italy’s 10-year yield climbing more than 0.2 percentage point to a euro-era high.

Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing fast.

“I’m afraid to hope. I still hope, yes, but I’m not optimistic,” he said.

“We’ve had solutions in the past, but we haven’t grasped them. Now it’s too late for some of those solutions to work anymore; the opportunity has been lost.”

BRUSSELS (Reuters) – Euro zone leaders will meet in Brussels on July 21 to discuss a second bailout package for Greece and the financial stability of the euro area, European Council President Herman Van Rompuy said on Friday.

The summit, which will start at 1000 GMT, could prove a critical moment in determining what role private sector creditors play in further aid to Greece, and how EU leaders will stem the threat of debt contagion to Italy and Spain.

“Our agenda will be the financial stability of the euro area as a whole and the future financing of the Greek program,” Van Rompuy said in a statement posted on Twitter.

“I have asked the preparatory work to be brought forward inter alia by the finance ministries,” he said, indicating that senior finance officials would meet ahead of time, probably on Wednesday July 21, to agree the agenda.

With the region’s debt problems now threatening Italy, the euro zone’s third largest economy, there is a pressing need for leaders to come up with a bolder and more comprehensive solution to a crisis that has dragged on for more than 18 months.

The first priority is for the euro zone to agree on the terms of a second bailout package for Greece, which needs about 110 billion euros of extra funds to keep it financed until the end of 2014, when it is supposed to return to financial markets.

Germany wants Greece’s private creditors — banks, insurance funds and other investors — to shoulder some of the burden of the second package, preferably as much as 30 billion euros. However, talks with the private sector over the past three weeks have failed to reach a deal on how they will be involved.