German Chancellor Angela Merkel and French President NicolasSarkozy will outline a joint position to solve Greece's debt crisiswhen they arrive in Brussels for a summit convened to stamp outcontagion in European bond markets.

The pact was agreed on after a seven-hour meeting in Merkel'sChancellery in Berlin that ended after midnight, according to astatement distributed to reporters. Merkel and Sarkozy “listened”to the views of European Central Bank President Jean-ClaudeTrichet, who was also present, though the statement didn't say ifthey settled differences on whether Greece should be allowed todefault.

European Union officials will follow a two-pronged approachtoday, focusing on the need to agree on a second bailout for Greeceand measures that stop the debt crisis engulfing Italy and Spain.Greek options include funding a rescue using a bank tax, allowinginvestors to roll over Greek debt, cutting the interest rates onoutstanding bailout loans and managing a bond default.

Leaders may also consider broader steps for stopping the21-month sovereign debt crisis previously rejected by Germany,including the use of precautionary credit lines, a person close tothe talks said yesterday. Deutsche Bank AG Chief Executive OfficerJosef Ackermann was among those entering today's talks.

Plunging Bonds
Leaders are due to gatherat 1 p.m. in the Belgian capital after meetings of nationalgovernment officials earlier in the day. Belgian Finance MinisterDidier Reynders told Le Soir newspaper a second Greek rescue wouldbe worth around 110 billion euros ($157 billion).

The yield on Greece's two-year bonds rose above 40 percent forthe first time yesterday after weeks of bickering among officialson how to prod bondholders into co-funding a new Greek package. Thedebate has unsettled investors who have also dumped Spanish andItalian bonds, sending the spread over German bunds to euro-erahighs.

The euro rose to a one-week high against the dollar after theannouncement of a common position early today. The 17-nationcurrency traded at $1.4283 as of 8:42 a.m. in Brussels from $1.4215in New York yesterday, after touching $1.4274, the strongest levelsince July 14.

The Berlin talks took place amid growing pressure on Merkel totake charge of Europe's crisis response two days after PresidentBarack Obama spoke by phone with her to discuss the risk to theworld economy radiating from Europe.

'One Spectacular Step'
Euro-areagovernment chiefs are convening for the second time in a month asthey aim to break a deadlock over a new Greek rescue. While Merkelsaid July 19 the crisis can't be resolved in “one spectacularstep,” Greek Prime Minister George Papandreou said in an interviewthat the summit could be a “make-or-break moment” for the euroregion.

“We have found solutions to previous crises and we'll find asolution now as well,” French Foreign Minister Alain Juppe toldreporters in Madrid yesterday. “A failure would be catastrophic forthe euro zone.”

Reynders told Le Soir that debate at the summit will focus onhow to finance the package and the role of private investors, andthat “it shouldn't be difficult” to agree on a new plan.

The German government expects that the private sector will sharesome of the costs of aiding Greece, Finance Ministry spokesmanMartin Kotthaus said yesterday.

Euro Bonds
Some officials are indicatingthat the only way for the crisis to be stopped is for Merkel tosurrender her opposition to euro bonds. While it would helpdebt-strapped nations access markets, she rejects it as a step toofar because it would remove pressure on governments to pursueausterity, and also risk pushing up the cost of credit for hertaxpayers.

Greece's sovereign-debt crisis risks contaminating the rest ofthe euro region even if officials avert a default, theInternational Monetary Fund said. Greek Finance Minister EvangelosVenizelos will travel to the U.S. to meet with IMF ManagingDirector Christine Lagarde on July 25, the Athens-based FinanceMinistry said yesterday.

Both the European Commission and the ECB “considered that asovereign default or a credit event would likely trigger contagionto the core euro-area economies with severe economic consequences,”according to an IMF staff report on the region's economy releasedtwo days ago. “Staff however also saw serious risks of contagion,even under a strategy which tries to avoid default or creditevents.”

Crisis Tools
European leaders are at oddswith one another and with the ECB over demands by Germany andFinland that private investors bear some of the burden of a newGreek bailout.

Spain wants the EU to increase the “flexibility” of its crisistools, including the ability to buy bonds in the secondary market,Finance Minister Elena Salgado told lawmakers in Madrid yesterday.That mirrored calls by the IMF to “scale up the capacity” of theregion's rescue fund and make it more adaptable.

European officials are considering a tax on financialinstitutions as one possible route to help finance a second Greekbailout and avoid any kind of default, according to an EU paperobtained by Bloomberg News.

The one-page document, dated July 16, lays out three ways toconstruct a Greek rescue that includes the involvement of privatecompanies. In addition to a bank tax, “Option Three” could alsoinclude a voluntary rollover of Greek debt.

The other two proposals are likely to involve some form ofdefault, the document said.

BloombergNews

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.