Merkel urges ‘substantial’ bank aid for Greek debt

German Chancellor Angela Merkel yesterday urged “substantial” aid from private creditors in resolving Greece’s debt woes, as the Eurogroup warned the crisis could spread like a firestorm through other EU economies.

In the ongoing EU negotiations on a second bailout package for indebted Greece there must be agreement on “substantial” input from private banks, Merkel told a meeting of her Christian Democrat Union party in Berlin.

However, such talks should not be held in public, she added, concerned that all talk of Greece’s problems and the possibility of a debt default spooked investors and the ratings agencies.

The EU and the International Monetary Fund are trying to assemble a second bailout package for Greece worth almost as much as last year’s €110 billion loan deal.

However, these bailouts are linked to the need for Athens to introduce strict austerity measures to rein in the burgeoning national debt, leaving the government to deal with widespread public protest.

EU ministers will meet in Luxembourg today to discuss details of the deal.

Greek Prime Minister George Papandreou announced a new government line-up last Friday, bringing in a team of political veterans to ward off economic meltdown and seek to avoid the civil unrest growing.

Last Friday, Merkel veered away from a collision course with the ECB over Greece, soothing markets through a show of unity alongside French President Nicolas Sarkozy.

She said she now backed a new package for Athens along the lines of a deal on Romanian debt agreed in Vienna in 2009, whereby private banks agreed to buy new government bonds to replace ones that matured. The deal would thus avoid any forced involvement by the private sector, something the market would be likely to construe as a debt default.

“We are well aware of these worries, which is why we are calling for a solution as soon as possible,” Merkel, the head of Europe’s top economy and the biggest contributor to the eurozone’s three bailouts so far, told reporters last Friday.

“The main message is of voluntary involvement (of private investors in the rescue). This is an important message to the banks. There are concerns that we wanted to create a so-called ‘credit event’. That is not what we want.”

Eurogroup head Jean-Claude Juncker warned yesterday that the debt crisis hitting Greece and others could affect Italy and Belgium, saying in an interview with a German daily, “we are playing with fire”.