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Euro Zone Moves Toward Greek Deal



BRUSSELS—European negotiators were homing in Thursday on ways to reduce Greece's debt burden while containing the possible knock-on effects to other weak economies in the 17-nation euro zone, after the way to a deal was paved by an accord Wednesday night in Berlin by the German and French leaders.
As euro-zone leaders gathered for an emergency summit in the Belgian capital, officials said the Berlin meeting had allowed significant movement toward a deal on Greece and an increase in the powers of the euro-zone bailout fund to prevent contagion from spreading to other weak economies in the euro zone.
In Berlin, French President Nicolas Sarkozy dropped a plan that would have imposed a tax on banks to partly finance Greece's bailout, in order to secure German Angela Merkel's support for a broader effort to deal with the crisis.
According to a draft document under discussion by the leaders of the 17-nation group, the plan includes cutting the interest rates on bailout loans to Greece from 5.5% to 3.5% and doubling the repayment period to 15 years. Officials said Ireland and Portugal could also see the interest rates on their bailout loans cut to the same low interest rate.
The document also outlined a proposal to encourage private investors to exchange their bonds to Greece for new bonds, which officials said could have a maturity of up to 30 years and which would impose less of a burden on Athens. Also on the table, a buyback of Greek bonds at the heavy discount to face value at which they are trading.
"The aim is to give investors an option of a [bond] swap or a buyback if it can be done," said a euro-zone finance minister who asked not to be identified.
The draft plan also proposes new powers for the European Financial Stability Facility, the EU's bailout fund, to make loans to countries on a precautionary basis to prevent them from sliding into financial troubles. It also suggests the fund should be able to lend to euro-zone governments to help them boost the capital of their banks, and buy back bonds from other countries.
European officials stressed that negotiations were still under way and all the options might not survive the discussions among euro-zone leaders expected to end later tonight. Germany has been resisting debt buybacks by the EFSF, for instance.
Some of the options to ease Greece's debt to bondholders would probably cause losses to banks and others, and trigger a temporary assessment of default against Greece by credit-rating agencies. But officials said investors wouldn't be compelled to participate. Talks were also under way in Brussels between euro-zone officials and top bankers, led by Josef Ackermann, chief executive of Deutsche Bank, about the options.
Speaking to Dutch lawmakers in The Hague, Finance Minister Jan Kees de Jager said Thursday that euro-zone governments seem to have accepted that Greece will be put into "selective default" when the country gets a new financial-aid package.
After contacts with his German and French counterparts Wednesday, Mr. De Jager said that both France and Germany no longer aim to prevent Greece partly defaulting on its debt. "Discussions to prevent a selective default are off the table," he said.
"The...paper we are working on now suggests a selective default," said one euro-zone official participating in preparatory talks.
A rating agency may assign a selective default rating if a borrower misses a payment on a specific bond or loan, but continues to service its other debts.
Several officials said that after months of opposition, the European Central Bank, appeared to be coming round to the idea of a temporary default. One possibility under discussion has been for the EFSF to protect the ECB from losses by buying the almost €50 billion ($71.08 billion) of Greek bonds it is estimated to hold at cost price.
The ECB has expressed concerns that default for Greece could hurt other countries by encouraging investors to believe a similar approach is likely for Portugal and Ireland. The draft statement sought to ring-fence Greece by declaring: "Greece is in a uniquely grave situation in the euro area. This is the reason why it requires an exceptional solution."
In order to encourage private-sector creditors to participate in the Greek bond exchange, the replacement bond would carry "credit enhancements" that would guarantee some payments to investors.
According to officials, there has been no discussion about expanding the capacity of the EFSF to lend more than €440 billion it can at present. Such a decision may be necessary in future, they said.
—Nathalie Boschat, Matthew Dalton, Maarten van Tartwijk, Geraldine Amiel, Marcus Walker and Laurence Norman in Brussels contributed to this article.

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