France and Germany agree common position for crisis summit

French president Nicolas Sarkozy’s office said today he and German chancellor Angela Merkel had overcome differences and agreed on a common position before the emergency European debt crisis summit.

The leaders of the two largest economies in the eurozone held last-ditch talks for seven hours in Berlin ahead of today’s summit in Brussels, Mr Sarkozy’s office said.

It said in a statement that the two leaders “reached agreement on a common Franco-German position” without elaborating on what the position was.

Yesterday Germany had played down calls for anything “spectacular” while France had pushed for a strong, long-term aid plan for Greece at today's summit.

The stakes are high. Markets have been extremely volatile over the past weeks over fears the crisis might spread to larger countries like Italy.

The International Monetary Fund warned that leaders must do more to keep debt troubles from poisoning the entire continent’s economy.

Mrs Merkel and Mr Sarkozy met European Central Bank chief Jean-Claude Trichet yesterday as they worked towards a plan. They told EU president Herman Van Rompuy about their agreement so he can take it into account in his consultations before today’s meetings, expected to start at noon Brussels time, the French statement said.

Earlier, Mrs Merkel’s spokesman Steffen Seibert said the leaders would discuss “all the options on the table and agree, if possible, on a joint position”.

But he reiterated Mrs Merkel’s stance that the talks would not yield a “spectacular solution” that fixed Greece’s problems quickly, but would be merely a stepping stone in a longer process.

Mrs Merkel had said there would be no decision to restructure Greece’s debt or create eurobonds that linked debt across countries.

The French government and the European Commission, however, warned that it was urgent that the EU came up with a significant deal.

French finance minister Francois Baroin told France-Info radio yesterday that “there should be a strong message tomorrow, from the highest level”.

European Commission president Jose Manuel Barroso said “nobody should be under any illusion, the situation is very serious”.

He said that at the very least, leaders needed to present how they would make Greece’s debt sustainable, under what terms private creditors would have to contribute to a new bail-out for the country, and what new powers to give to their bail-out fund.

European leaders have faced criticism for their slow, piece-meal efforts to stem the debt crisis.

The International Monetary Fund urged European leaders to act more boldly, warning that there was “no consistent road map ahead” and that this could produce “possible significant regional and global spillovers”.

“Market participants remain unconvinced that a sustainable solution is at hand,” the report said. “Limiting any further damage is now crucial.”

Borrowing rates have risen particularly sharply in Italy and Spain and while they eased slightly a day ahead of the summit, sentiment remained fragile as investors saw no immediate way through Europe’s policy stalemate.

Mrs Merkel has opposed a restructuring of Greece’s debt that would force losses upon private sector creditors as well as any notion of creating eurobonds – debt that links different countries together.

Such jointly-guaranteed bonds for the entire eurozone would make borrowing cheaper for countries with shaky finances but more expensive for nations with a top rating such as Germany. Unsurprisingly, Berlin is the main country to oppose such a measure.

Germany and France stressed that both nations must seek a joint position to make the summit of the 17 eurozone nations’ leaders a success.

So far, discussions on the contribution of private creditors have revolved around three options, according to a paper from a eurozone officials’ working group dated July 16.

The first would see the eurozone’s bail-out fund finance a buy-back of Greek government bonds at their current distressed prices, paired with guarantees that the remaining bonds would be repaid. That option would give the Greek state the biggest short-term relief, but may be the most expensive for the eurozone.

The eurozone would not only have to fund the buy-backs and repayment guarantees, but the paper says they would probably be seen as a default by rating agencies. That would force the eurozone to come up with the liquidity support for Greek banks that would be cut off from the European Central Bank’s financial lifelines.

The second option reverts to a proposal made by French banks several weeks ago. Banks would reinvest part of the money they collect from maturing Greek bonds into new bonds with long repayment deadlines.

However, that proposal would still trigger a “selective default” rating, requiring liquidity and capital support for Greek banks. It would provide significant short-term relief for Greece, the paper says, but should come with lower interest rates and longer maturities for the eurozone loans.

The third option is the only one that would avoid a default rating, but will probably run into huge opposition from banks that do not hold Greek bonds.

It proposes a tax on the financial sector to recoup part of the cost of rescuing Greece. However, it would only result in small short-term relief for the country.

By the time the leaders’ top advisers meet today ahead of the summit, the paper will most probably be narrowed down to two possible plans: one that would trigger a default – a combination of option one and two – and one that will not, said a eurozone official.

Greece, meanwhile, is struggling to reduce its budget deficit from 10.5% of Gross Domestic Product in 2010 to 7.5% this year as it implements harsh austerity measures that have pushed the country into recession.