Germany calmed fears that it wanted to force losses on Greece's private creditors, agreeing on Friday with France that any private sector involvement should be voluntary as part of a new rescue plan European countries are preparing.
Chancellor Angela Merkel and French President Nicolas Sarkozy said they had reached common ground on the delicate topic of involving Greece's bondholders.
Merkel's statement appeared to back away from demands made previously by her finance minister, who had called on banks and other private bondholders to give Greece an extra seven years to repay its bonds.
Rating agencies as well as the European Central Bank, however, warned that such a moved would likely count as a "credit event," a partial default by Greece that could spread panic on financial markets and hurt Greek banks.
Both leaders stressed ahead of a working lunch that a "voluntary" extension of maturities of Greek government bonds held by private investors should be part of that solution in order to ensure market stability.
"There are worries that we want to cause a credit event," Merkel said. "We do not want that. This is about a voluntary participation."
Merkel and her government had in recent months been pushing for private creditors to share a larger part of the burden, amid political pressure from German voters who complained about having to support last year's euro110 billion package.
The two leaders said a new rescue plan for Greece needed to be in place soon to help the country and ensure the stability of the euro.
"The quicker the better," Merkel said. European finance ministers meet this weekend to try and resolve the issue.
A decision to extend the maturities of Greek bonds without the creditors' consent or a haircut on the value of the debt would be an immediate hit to banks, with the biggest fear being that of contagion - a difficult-to-predict chain reaction that could roil markets and make it harder for other indebted countries to cope with their debts, with the result being higher borrowing costs for eurozone countries.
"We will do everything to maintain the euro and its stability as a whole," Merkel said.
The European Central Bank has been very hostile to seeing private creditors sharing a part of the burden for fear it would be considered a credit event that would erode trust in the 17-nation currency.
Merkel therefore stressed that any solution must be found in accordance with the ECB.
"This should be worked out with the European Central Bank. There may be no contradictions here," she said.
The EU's top financial official, Olli Rehn, indicated Thursday that Greece will likely get its next financial lifeline in July if Prime Minister George Papandreou's government can pass new budget cuts and privatizations before the end of the month. The next euro12 billion ($17 billion) injection would keep the country afloat until September.
In Athens, Papandreou replaced his finance minister Friday as part of a broad reshuffle in an effort to calm criticism and meet the requirements to get the fresh aid injection.
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