* Germany, France warn Greece no more aid till debt swap
* Talks complicated by splits among creditors, CDS
* Merkel, Sarkozy want March financial transaction tax
* Italy banks' dependency on ECB loans soars
By Stephen Brown and Noah Barkin
BERLIN, Jan 9 Germany and France warned
Greece on Monday it will get no more bailout funds until it
agrees with creditor banks on a bond swap and pressed for an
early deal to avert a potential default in the euro zone's most
Chancellor Angela Merkel and President Nicolas Sarkozy, the
euro zone's two leading powers, insisted after talks in Berlin
that private sector bondholders must share in reducing Greece's
debt burden, along with new European and IMF lending.
They rejected both a call by a European Central Bank
policymaker to abandon plans to make private investors take
losses, and a leaked International Monetary Fund memo that cast
doubt on Athens' ability to reform its public finances.
"We must see progress on the voluntary restructuring of
Greek debt," Merkel told a joint news conference. "From our
point of view, the second Greek aid package including this
restructuring must be in place quickly. Otherwise it won't be
possible to pay out the next tranche for Greece."
Merkel and Sarkozy both voiced their determination to press
ahead with a tax on financial transactions opposed by Britain,
but they appeared to diverge on the timing.
Sarkozy, facing a strong left-wing challenge in his struggle
for re-election in May, suggested France could go it alone and
challenge other states to follow suit.
Merkel said all 27 EU finance ministers should report in
March, and the 17-nation euro zone should move ahead if other
countries continued to block an EU decision. But she
acknowledged that she did not have full agreement on this within
her centre-right coalition government.
A Greek government official said talks with private
bondholders on a debt swap key to averting default were
progressing but there was no deal yet. However,
a senior insurance executive briefed on the negotiations said
they were very difficult and likely to be unsuccessful.
The executive, who is not directly at the table, said
roadblocks included whether a debt writedown would trigger
credit default insurance or not, and how a sufficient number of
creditors could be corralled into joining an agreement.
The only hedge fund on the steering committee representing
private creditors, Madrid-based Vega Asset Management, walked
out last month. French bank BNP Paribas, which has a
strong interest in a deal given its large exposure to south
European sovereign debt, said last week that agreement was near,
but other banking sources are more sceptical.
Merkel's tough comments highlighted growing concern among
European governments that a potential collapse of the Greek
rescue negotiations poses the most immediate threat of
destabilising the entire 17-nation euro currency and the global
On other issues, Merkel and Sarkozy said they aimed to wrap
up negotiations among euro zone countries this month on a new
fiscal pact tightening budget discipline, to be signed at the
latest on March 1. The latest draft would give more power to the
executive European Commission to reject national budget plans
that deviate from agreed EU targets.
Euro zone states agreed last month to press ahead with an
agreement outside the EU treaty after Britain vetoed plans to
amend it to allow stricter enforcement of deficit limits.
The German and French leaders also agreed to ask the ECB to
recommend how the euro zone's rescue fund, the European
Financial Stability Facility, could be made most effective.
Berlin has so far opposed calls from Paris and elsewhere to
increase the size of the 440 billion euro EFSF, but it might be
politically easier to relent in response to an ECB call.
Greek Prime Minister Lucas Papademos said last week that
Athens risked an uncontrolled default in late March unless it
agrees a new aid package with the so-called troika of the euro
zone, the ECB and the IMF by then.
An internal IMF memo, quoted by the German magazine Der
Spiegel on Saturday, said the freefall of the Greek economy has
made international lenders' plans to rescue Greece obsolete,
threatening the debt sustainability of the embattled euro member
Merkel said she wanted Greece to stay in the euro zone, and
a private sector debt writedown was "a necessary but not
sufficient precondition to get Greece back onto an acceptable
"Greece should get a chance but Greece remains a special
case," she said, adding that Athens must commit to further
ECB Governing Council member Athanasios Orphanides wrote in
Friday's Financial Times that dropping plans to force losses on
investors would "help restore trust" in the euro zone and lower
the borrowing costs of other governments in the currency area.
It was not clear if he was expressing a personal view or
speaking for the central bank. Former ECB president Jean-Claude
Trichet long opposed private sector involvement in debt relief,
only reluctantly accepting a "voluntary" bond swap last July.
A perceived risk of writedowns on other euro zone government
bonds has spooked investors and been one major factor in raising
borrowing costs for other southern European states.
Spain and Italy have to issue hundreds of billions of euros
in bonds in 2012 starting this week to roll over maturing debt.
The risk premium on Spanish and Italian bonds over
safe-haven German 10-year Bunds narrowed slightly on Monday, and
the ECB disclosed that it had kept a tight rein on its purchases
of government debt in the first week of the new year, spending
just 1.1 billion euros.
The two-year-old debt crisis has raised doubts about whether
the euro zone will survive in its current form, especially in
non-euro Britain and the United States.
British Prime Minister David Cameron, an avowed Eurosceptic,
said in a television interview he believed the single currency
area would most likely hold together "but it has to take some
pretty decisive steps".