Originally published Tuesday, October 18, 2011 at 4:18 AM

French, German disagreement endangers Greek deal

Disagreement between France and Germany may prevent eurozone leaders from reaching a crucial deal on a second rescue package for Greece this weekend, a person familiar with the negotiations said Tuesday.

AP Business Writer

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Disagreement between France and Germany may prevent eurozone leaders from reaching a crucial deal on a second rescue package for Greece this weekend, a person familiar with the negotiations said Tuesday.

A common position of the two biggest eurozone economies is seen as a precondition for reaching agreement between all 17 countries in the currency union at a crisis summit on Sunday.

Investors around the world hope a comprehensive plan to fight the debt crisis, including final details on Greece's second bailout, will keep the debt turmoil from pushing the global economy back into recession. Signs that such a plan is proving slower to clinch caused markets to slide on Tuesday.

Germany is pushing for banks to accept cuts of 50 percent to 60 percent on their Greek bondholdings, while France is insisting that leaders should only make technical revisions to a preliminary agreement reached with private investors in July, the person said.

The person was speaking on condition of anonymity because of the sensitivity of the negotiations.

The July deal would lead to losses of some 21 percent on Greek bondholdings, much of that from cuts in interest rates and deferred payments.

While that would take some pressure off Greece in the coming years, it would do little to reduce Greece's overall debt load, which is set to reach more than 180 percent of economic output next year if the deal goes ahead, the person said.

German officials have said in recent weeks that the eurozone needed to find a solution for Greece that makes the country able to repay its debts in the long-run.

France on the other hand has been reluctant to back bigger losses for banks, since French banks are among the biggest holders of Greek government bonds. Its position is supported by the European Commission, the EU's executive.

Under the preliminary agreement reached in July, the eurozone would give Greece an extra euro109 billion in rescue loans. About one-third of that money would go into setting up expensive collateral funds for the banks that would secure them against any further losses on the Greek debt.

But because of worsened market conditions since July, setting up those funds has become more expensive. A revision of the deal would either have to result in bringing the costs for the eurozone back down or achieve somewhat higher cuts to the debt, the person familiar with the negotiations said.

The Institute of International Finance, the big bank lobby that has been leading negotiations of the deal, has said that banks would be unlikely to voluntarily accept much bigger haircuts on bonds than the 21 percent.

Charles Dallara, the managing director of the IIF, and Deutsche Bank CEO Josef Ackermann were in Brussels Tuesday for negotiations with eurozone officials, a spokesman for the institute said in an email, without giving further details.

But the person familiar with the negotiations would not rule out that private investors may eventually agree to bigger losses.

"It's not to say that because their first reaction was cold ... they will not engage in discussions," he said.

The second rescue package for Greece is part of a broader solution to the escalating debt crisis EU leaders have promised for this weekend. It will also include a deal to maximize the impact of the euro440 billion ($600 billion) rescue fund and higher capital levels for banks to make sure they can sustain market turmoil.

German Chancellor Angela Merkel tried to scale back expectations of the summit Tuesday, warning that the meeting was "an important step, but it is clear that further steps will follow."

The disagreement between France and Germany on the Greek rescue signifies a larger split between the two countries. France - which finds itself increasingly under scrutiny by worried investors - is concerned that having to help its banks suffer through Greek losses will hurt its own credit rating, while Germany seeks to limit bailout costs for its taxpayers.

Rating agency Moody's warned Tuesday that it might in the next three months start a review of France's credit worthiness, due to the country's worsened economic outlook and a growing crisis bill.

"France may face a number of challenges in the coming months - for example, the possible need to provide additional support to other European sovereigns or to its own banking system, which could give rise to significant new liabilities for the government's balance sheet," Moody's said.

The warning came as French Finance Minister Francois Baroin said that the 2012 growth estimate of 1.5 percent was "probably too high." In an interview on France-2 television, Baroin blamed the risk of a global slowdown, which he said could be "very vast" and "severe."


Angela Charlton in Paris and Juergen Baetz in Berlin contributed to this story.

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