* Berlin dinner trade-offs shaped deal to save euro
* France abandoned tax, Germany accepted fund flexibility
By Brian Rohan
BERLIN, July 22 When push comes to shove,
nothing gets done in Europe without Germany and France bridging
Thursday's summit to rescue Greece and shield the euro from
market attack served as a reminder of the European Union's
dependence on its founding powers to pull it out of crisis when
the chips are down.
By the time all 17 euro zone leaders met in Brussels, a deal
had been hammered out at a marathon meeting in Berlin that ended
with Chancellor Angela Merkel, French President Nicolas Sarkozy
and the head of the European Central Bank all staying the night
in the German capital.
Agreement did not come easily. Merkel sought to lower
expectations in advance, saying the summit would not be a
"spectacular event which solves everything", while the French
government said it needed to yield a "lasting solution".
A French delegation source called the meeting "heated",
while a German government official said it was clear that both
countries "had different ways to reach the same goal".
Sarkozy had wanted a tax on banks to help finance a buyback
of Greek bonds, while Merkel insisted that banks and insurance
companies must be made to accept a reduction in the value of
their Greek debt holdings to share the pain with taxpayers.
After meeting for only an hour, both sides broke off to
consult separately and dinner was pushed back.
German Finance Minister Wolfgang Schaeuble joined them and
ECB President Jean-Claude Trichet caught the last Lufthansa
flight from Frankfurt at Merkel's and Sarkozy's request.
Sarkozy later said the belated invitation to Trichet came
because of a need to make any deal credible in the eyes of other
euro zone governments and the International Monetary Fund.
"Some countries, Germany included, wanted to get the private
sector to participate, and an institution that counts, the ECB,
was against it and feared the consequences," the French leader
said. "We had to find a compromise."
By this point, France's proposal of a bank levy was already
off the table, sources familiar with the negotiations said.
Berlin had sent officials to Paris beforehand, so it is possible
that the idea, which Sarkozy suggested was raised as a threat to
spur banks to participate, was dropped there.
ALL LOOPED IN
"The tax served us well," he said, adding with irony: "I
think it boosted their enthusiasm...it facilitated discussions."
Both sides kept top bankers in the loop during the Berlin
meeting, government sources said, adding that Germany had also
contacted at least one euro zone country -- the Netherlands --
during the talks.
The Dutch, with a minority administration reliant on
parliamentary support from a Eurosceptical populist party, were
sticklers for private sector involvement in any further funding
It took far-reaching assurances, Sarkozy said, to convince
Trichet to accept the possibility of a selective default for
Greece -- the first sovereign default in Western Europe in more
than four decades and a potential scar on his legacy at the ECB.
"To convince Mr Trichet, it was necessary to obtain
flexibility; flexibility that lay in the recapitalisation of
banks and the secondary market," he said, referring to an
agreement to allow the euro zone rescue fund to purchase bonds
and act preemptively to support governments and banks.
Seven hours passed before a deal was in the bag.
The next day, Deutsche Bank head Josef Ackermann and Charles
Dallara, managing director of the Institute of International
Finance, worked the phones with bank CEOs around Europe, with
some horsetrading to assure additional funding for Greece.
But the deal that would lead banks and insurers to an
anticipated writedown of 21 percent on their Greek bonds had
been decided in Berlin, a source in the banking sector said.
Merkel agreed to drop Germany's past insistence on a penalty
charge for "debt sinners". They agreed to cut the interest rates
on bailout loans to Greece, Ireland and Portugal to around 3.5
percent, and extend the maturities to at least 15 years.
Sarkozy, an aide said, was confident of the outcome, talk of
which had already started a rally in the euro, and wanted it
sealed before the start of the summer vacation season.
"The president had time to go running for an hour in Berlin,"
(Reporting by Brian Rohan, Emmanuel Jarry in Paris, Alex
Chambers in London, Marc Jones in Frankfurt; editing by Paul