Germany backed away Friday from a confrontation with the European Central Bank over a new bailout package for Greece, agreeing under pressure from France not to force private investors to shoulder some of the burden.
The German government’s previous insistence on what the finance minister called "fair burden sharing" had renewed market jitters by threatening to derail negotiations on the second rescue, which will be needed to avert another financing crisis next year.
Chancellor Angela Merkel and the French President Nicolas Sarkozy announced the agreement after a two-hour meeting in Berlin.
European stock markets turned positive on the news and the euro strengthened against the dollar, reversing its earlier decline. Risk premiums on Greek and other peripheral-country bonds declined after a week-long rout, according to Reuters.
The European Central Bank -- which itself holds billions of shaky Greek debt -- has firmly opposed anything that could trigger what rating agencies call a "credit event," or default. Mario Draghi, who has been nominated to succeed Jean-Claude Trichet as bank president, testified on Tuesday that the bank could only accept including bondholders if it were "entirely voluntary."
One acceptable option, he indicated, is known as the Vienna Initiative, after a 2009 agreement under which international lenders agreed to roll over credit lines and maintain their exposure to Central and East European countries to carry them through the global financial crisis.
On Friday, Mrs. Merkel said the Vienna Initiative was a "good basis" for a solution. Mr. Sarkozy agreed. But neither gave details about how the private investors would work with the International Monetary Fund and the ECB. They said they were waiting for the troika -- the IMF, the ECB and the European Commission -- to present its latest report on Greece’s situation.
Amid suggestions that Germany was pushing to delay a decision on the second rescue until September, Mrs. Merkel said she wanted "a solution as quickly as possible," and hoped the new package would be decided by next month.
Mrs. Merkel, who has been weakened politically by a series of local election defeats, now faces the potential for a rebellion in her centre-right coalition over the concession.
Lawmakers from her Christian Democratic Union party and from her coalition partners, the Free Democrats, who are increasingly euro-skeptic, are staunchly opposed to the taxpayer alone bailing out Greece again.
Like-minded countries that have backed Mrs. Merkel and her finance minister, Wolfgang Schäuble, including the Netherlands, Austria and Finland, could also still protest.
On the other side, countries like France, whose banks are the most exposed to Greece, and the ECB, which has been a buyer of last resort for Greek sovereign debt, are afraid of anything that smacks of default. Such a "credit event" could lead to damaging losses for banks and a freezing up of the global credit markets, such as followed the Lehman bankruptcy in 2008.
To stave off an imminent default, Greece needs to get the next installment of the €110-billion, or $155-billion U.S., loan package it received a year ago released soon. That amounts to €12 billion.
Further out, Greece is going to need another bailout -- estimated at up to €60 billion -- because it won’t be able to return to markets next year as initially planned.
EU and IMF officials have expressed confidence that an agreement to release the €12 billion could be made at a meeting of euro group finance ministers on Sunday night in Luxembourg, while the question of a second rescue package could be put off until July. But politically, any new rescue package depends on Greece pushing through additional savings to close a widening budget gap — a demand that provoked a government crisis in the country this week.
