The eurozone faces a moment of truth at a special debt crisis summit on Thursday, with nervous markets waiting to see if leaders can finally come up with a desperately needed solution.
The omens have not been good -- it appeared at one stage that German Chancellor Angela Merkel might not even attend but is appears today more likely that she would, as long as an accord was on the table.
Officials meanwhile were meeting to lay the groundwork in the hope of healing deep divisions between Germany, which wants the private sector to take some of the pain of a second Greek bailout, and the European Central Bank, which believes that course could lead to a disastrous default.
Comments by officials and analysts highlight the tensions:
- Merkel spokesman Steffen Seibert said the chancellor would attend the summit on Thursday and that its success depended on whether eurozone leaders could speak with one voice.
The markets were testing eurozone unity, he said.
"Are you going to hold together, are you really ready to rescue the euro in its first big test?" was their question, he said.
- Merkel described the meeting as "urgently necessary" but said: "I am only going if there's an outcome," according to broadcaster ARD.
- An EU official in Brussels said European Union President Herman Van Rompuy "would not have called a summit if he had not received enough signals from the big countries, and Germany in particular, that there was enough on the table to negotiate" an agreement.
- European Central Bank head Jean-Claude Trichet defended Merkel against criticism for her handling of the crisis. "Discussion of this kind" was completely misplaced, he commented and highlighted the dangers of a default.
"Governments have been warned (that) ... if a country defaults, we will no longer be able to accept its defaulted government bonds as normal eligible collateral." Trichet said.
In that case, many eurozone banks could find themselves without funds, causing credit to dry up and the economy to falter -- another, dangerous spiral down in the growing crisis.
US Treasury Secretary Timothy Geithner urged European Union leaders to step up their efforts.
"What Europe obviously needs to do is to work more forcefully to contain the risk of an escalating crisis in Europe," Geithner said in an interview with business television network CNBC.
"The world needs to see the European leaders move now ... to put in place those additional changes that would help contain the risk of a broader crisis.
"They have the capacity to manage this in a way that doesn't add to the broader burdens in the global economy, and of course we want them to do that."
On the markets, stocks and bonds tumbled as investors bought safehaven stalwart gold, pushing the metal to fresh record highs.
Italian and Spanish markets were amongst the worst hit, with the two countries seen as the most likely next victims of a debt crisis which has already snagged Greece, Ireland and Portugal.
- CMC Markets analyst Michael Hewson said "gold hit another milestone ... at $1,600 as investors lose confidence in the ability of politicians to get to grip with the debt problems weighing down on sentiment."
- Analysts at financial consultancy Capital Economics said that "continued dithering" by policy-makers appeared "to be pulling both Spain and Italy further into the crisis.
"Either they stop fiddling and take decisive action or they may soon have to start contemplating the unthinkable."
- US Secretary of State Hillary Clinton said in Athens Sunday that many analogies could be used to illustrate the sacrifices needed to overcome the eurozone crisis, such as strong medicine that "tastes terrible" or "chemotherapy to get rid of the cancer."
"While the payoff for these sacrifices may not come quickly, it will come. We know that," she said
Greece had "inspired the world before" and Clinton said she had "every confidence" that it could do so again.
- Greek Prime Minister George Papandreou said it was "time for Europe to wake up" and find a conclusive solution to the Greek debt crisis.
"There is no room for voices that cultivate fear and bank on failure."
Bank tax to help Greece worth studying: France
French European Affairs Minister Jean Leonetti said the eurozone is considering a tax on banks to raise funds to help debt-stricken Greece.
"It is one of the solutions being talked about and would have the advantage of not involving the private banks directly (in a second Greek bailout) and so avoid the problem of a potential default," Leonetti said.
The European Central Bank is adamantly opposed because forcing private creditors to effectively take losses on their holdings of Greek government bonds would amount to a default -- a point made by the top ratings agencies too.
France had suggested that the banks could take part in a second Greek rescue on a "voluntary" basis but the ratings agencies said that would not make the grade, leaving the eurozone floundering for a new way out at Thursday's summit.
German press reports said the tax on the banks would apply to all -- not just those holding Greek debt -- and the idea is being floated as a way of bridging the deep divisions within the eurozone on how to proceed.
Leonetti said the way forward "of course comes through a Franco-German accord... (for both sides) share the desire to save the euro and to stabilise Europe."