Germany is sticking to its guns in demanding that private investors contribute to a second bail-out for Greece despite a European Central Bank warning against triggering market turmoil.
Finance Minister Wolfgang Schauble urged parliament to back additional aid for the heavily indebted euro zone country, but said private creditor participation in a new package was 'unavoidable'. He reiterated that he favoured a bond swap that would push out Greek debt maturities by seven years.
The Bundestag lower house approved a non-binding resolution supporting extra emergency loans to Greece, but only on the condition that bondholders be made to share the burden.
Germany received backing for its stance from the Dutch, whose Prime Minister Mark Rutte said he viewed Germany's debt proposals favourably.
Greek Finance Minister George Papaconstantinou also said today that the debate over a new package for Greece appeared to be moving towards the voluntary participation of the private sector.
'If there are doubts about the ability of Greece to pay back its debt and we must win time with a new package, then the participation of the private sector in the solution is unavoidable,' Schauble said in a speech to parliamentarians.
At a Brussels summit on June 23-24, European Union leaders are due to finalise a new rescue package for Greece that officials say will total €120 billion and ensure the country is funded through 2014.
Half of that sum would come from the EU and IMF, with the remainder equally divided between privatisation receipts and a contribution from the private sector, but deep divisions remain about how to get the banks that hold Greek debt on board.
A deal would not help reduce Greece's massive €340 billion debt load, but it would give the country more time to implement economic reforms and return to growth.
Still, many economists believe Athens will struggle to avoid a harsher restructuring in the years ahead that imposes forced losses of 50% or more on holders of its debt.
European Council President Herman Van Rompuy, who will chair the EU summit, said he was confident there would be an agreement on a new package for Greece by the end of the month, .creating no default or credit event'.
Schauble dismissed criticism of his bond swap plan, telling the Bundestag it was a fair solution that would protect taxpayers. 'This would give Greece the necessary time to carry out reforms and win back confidence,' he said.
ECB fears 'credt event' domino effect
ECB President Jean-Claude Trichet made clear on Thursday that the central bank opposed any scheme for private sector involvement that would cause a 'credit event' or be considered by credit ratings agencies as a 'selective default'.
Reflecting the sensitive nature of the debate within the ECB, Trichet's deputy Vitor Constancio was forced today to retract comments made earlier in the day in which he said his boss was not ruling out an extension of Greek maturities.
In a clarification statement issued by the ECB, Constancio parroted the stance Trichet laid out at his Thursday news conference, saying that he excluded all concepts that were not purely voluntary.
The ECB is concerned that tinkering with Greek debt may set off a chain reaction in financial markets that would stretch far beyond Greece and undermine the creditworthiness of other struggling euro zone countries.
The international body that adjudicates on events that could trigger the payout of default insurance has said it would not typically regard a voluntary bond swap or a rollover of maturing debt as a 'credit event'. But all three major ratings agencies have said they would be likely to classify even an ostensibly voluntary debt swap as a 'selective default', since it was hard to imagine a rational investor maintaining Greek exposure without coercion.
Trichet's German colleague at the ECB, Juergen Stark, said he was personally in favour of private sector involvement but noted that feedback from the ratings agencies over the past weeks had changed the situation.
