FRANKFURT/LONDON Banks are poised to offer a complex Greek rescue proposal, which excludes a bank levy, to a meeting of euro zone leaders on Thursday, industry sources said.
The banks are ready to fight a levy in the courts if one is imposed on them to fund a Greek bailout, arguing it would unfairly punish those not exposed to the country, two of the sources said on Wednesday, though it was not clear on what grounds a legal case would be made.
The proposal from private sector creditors to Greece, being coordinated by the Institute of International Finance, would include a range of options but may not be the quick fix many are hoping for.
A private sector contribution that would reduce Greece's debt by up to 40 billion euros ($56.8 billion) is among the proposals, one senior bank industry source close to the talks said. But sources warned discussions remained fluid.
"It's difficult to achieve all objectives on liquidity and debt relief. A lot is being asked ... the public sector involvement is being presented as some sort of panacea," one of the sources said, echoing comments by German Chancellor Angela Merkel.
Euro zone officials will hold an emergency summit on Thursday to try to agree a second rescue of debt-stricken Greece, as fears mount its crisis will spread to other peripheral euro zone countries.
Merkel, who will meet French President Nicolas Sarkozy later, said on Tuesday that the summit would not produce one "spectacular" solution to solve everything.
"The IIF has presented a menu of options that meet the needs of different institutions," the source said. The IIF has previously said several options would help get a bigger private sector participation.
A tax on euro zone banks to raise 10 billion euros a year for three years has been proposed, but that would send a completely wrong signal by punishing banks regardless of their holdings, the sources said.
France, whose banks are most exposed to Greek debt, sovereign and otherwise, has been more supportive of the levy.
Banks had received signals that governments regard the tax proposal as a last resort if no other solution could be found, one of the bank industry sources said.
Imposing a bank levy on any member state could open the way for legal challenges and would also require European legislation that could be so complex it would risk delaying any speedy Greek solution, legal experts said.
"Europe has been debating a financial transaction tax for some time already, but the proposal has remained in the longer grass doubtless plagued by deep tensions between member states," said Ben Kingsley, a partner at UK law firm Slaughter and May. "The idea that a similar levy could be rushed through the European legislative process in time to rescue Greece seems a little fanciful."
A tax was put forward as an option in a confidential paper drafted ahead of the 17-nation summit and obtained by Reuters.
Other options include creditors voluntarily agreeing to roll over their holdings of government debt and extending the maturity, and a buy-back of Greek bonds to reduce its 350 billion euro debt pile -- nearly 160 percent of annual economic output.
Europe's banks held 98.2 billion euros of Greek government bonds at the end of last year, according to data revealed in a health check of 90 lenders on Friday.
Domestic banks had two-thirds of that. German banks held 9 percent and French banks about 8 percent.
(Reporting by Philipp Halstrick in Frankfurt and Alex Chambers in London; additional reporting by Kirstin Ridley and Steve Slater,; editing by Mike Peacock)