July 22, 2011 / 5:05 PM / 6 years ago

Horsetrading by heavyweights sealed euro zone deal

* Berlin dinner trade-offs shaped deal to save euro

* France abandoned tax, Germany accepted fund flexibility

By Brian Rohan

BERLIN, July 22 (Reuters) - When push comes to shove, nothing gets done in Europe without Germany and France bridging their differences.

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.


“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 for Greece.

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,” he added.

Reporting by Brian Rohan, Emmanuel Jarry in Paris, Alex Chambers in London, Marc Jones in Frankfurt; editing by Paul Taylor

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