Europe said to accept temporary Greek default in rescue

BRUSSELS | Thu Jul 21, 2011 9:35am EDT

(Reuters) - Europe is willing to let Greece default under a crisis response that would involve a bond buyback, a debt swap but no new tax on banks, EU sources said as euro zone leaders began a crucial emergency summit Thursday.

A draft summit statement obtained by Reuters showed leaders were also considering a sweeping expansion of the role of their EFSF rescue fund to help states sooner, recapitalize banks and intervene in the bond market in a drive to halt contagion.

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, who appears to have reversed the bank's stance.

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

"I expect we will be able to seal a new Greece program. This is an important signal. And with this program we want to grasp the problems by their root," Merkel told reporters on arrival in Brussels.

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

"The demand to prevent a selective default has been removed," he told the Dutch parliament. The chairman of the 17-nation currency area's finance ministers, Jean-Claude Juncker, also told reporters: "You can never exclude such a possibility, but everything should be done to avoid it."

According to draft summit conclusions, the maturities on euro zone rescue loans to assisted countries would be extended to 15 years from 7.5 and the interest rate cut to around 3.5 percent from between 4.5 and 5.8 percent now.

http://www.reuters.com/article/2011/07/21/us-eurozone-idUSTRE76I5X620110721