Sarkozy says he and Merkel will never abandon euro

DAVOS, Switzerland (Reuters) - French President Nicolas Sarkozy passionately defended the euro against skeptics at the World Economic Forum on Thursday, saying he and German Chancellor Angela Merkel would never let the currency fail.

Sarkozy spoke as financial executives attending the Davos gathering voiced cautious optimism that the euro zone’s debt crisis could be resolved without contagion spreading to Spain or investors being forced to take unbearable losses.

“To those who would bet against the euro, watch out for your money because we are fully determined to defend the euro,” Sarkozy said in a keynote speech. “Mrs Merkel and I will never -- do you hear me, never -- let the euro fall.”

U.S. Treasury Secretary Timothy Geithner, the European Union’s top monetary official, Olli Rehn, and leading bankers attended private meetings at the Forum on Thursday that focused on the euro zone and other issues of global financial stability.

Geithner voiced confidence at a closed-door meeting that EU leaders had taken a fundamental decision to do what it takes to keep Europe together, according to participants.

A year after the Greek fiscal crisis dominated Davos, leading to bailouts for Greece in May and Ireland in December, business leaders say expectations are growing that the EU may be preparing effective action to help weaker members of the single currency area and restore confidence in the financial sector.

"I think Europe did the only good choice, which is to get through this crisis, because if you don't fix it here, you're going to fix it there, which is in the banking system," JP Morgan Chase JPM.N Chief Executive Jamie Dimon said.

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He told a panel discussion it would be far too risky for any country in the euro zone to restructure its debt, citing the weakness of the financial sector and the risk of triggering unpredictable capital flight and a banking crisis.


European Central Bank chief Jean-Claude Trichet echoed Sarkozy’s robust defense, telling another panel: “There is no crisis of the euro currency. That is absolutely clear.”

Greek Prime Minister George Papandreou told delegates there was no question of his country defaulting or restructuring its debt, but Athens expected more time to repay IMF/EU rescue loans at a lower interest rate to help avoid a funding “bump” in 2014.

Trichet said there was no debt rescheduling or “haircut” -- in which bondholders are penalized by not receiving full repayment -- in the programs of the crisis-hit euro zone states.

However, some European insurance executives said private bondholders might be asked to take losses on some southern euro zone countries’ debt in the next few years, although it would not cause severe problems for their business.

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"We're positive the euro will continue to exist as a currency and the euro zone countries will work out their problems overall," Dieter Wemmer, chief financial officer of insurer Zurich Financial ZURN.VX told Reuters.

“I think that there’s the likelihood that in some areas some haircut will occur. Whether it will be dramatic -- I don’t think so,” Wemmer said in an interview.

EU leaders are expected to adopt a comprehensive package of measures at a summit in late March involving reforms to its rescue fund, tougher fiscal discipline rules and commitments to structural economic reforms to improve competitiveness.

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Many market analysts say Greece’s debt burden, set to reach 158 percent of gross domestic product in 2013, is unsustainable and will have to be restructured or rescheduled sooner or later.

U.S. economist Nouriel Roubini -- nicknamed Dr Doom for his early warnings before the financial crisis -- said that without stronger growth, Greece would not be able to service its debt.

“We need an orderly restructuring of this debt. And we should do this sooner rather than later,” he told the WEF forum in the Swiss ski resort.

“We need official resources, we need policies to restore economic growth and we have to restructure in an orderly, market-friendly way.”

Underlining the global struggle with debt, ratings agency Standard & Poor’s cut Japan’s long-term sovereign credit ratings to ‘AA-’ from ‘AA’ on Thursday, saying it expects the country’s fiscal deficits to remain high in the next few years.

Domenico Siniscalco, CEO of Morgan Stanley Europe MS.N and a former Italian finance minister, told Reuters Insider television that policymakers and bankers were working hard to find a solution to the euro zone "and I believe we are going to make it."

He said the euro zone rescue fund established to help states in difficult was “the embryo of a European treasury” and the huge demand on Monday for its first issue of bail-out bonds for lending on to Ireland showed it had market confidence.

Dimon said Germany was right to oppose any metallization of euro zone countries' debt. But the chief executive of German retailer Metro MEOG.DE, Eckhard Cordes, said that even though the idea of common euro zone bonds was not popular in Germany, it was the only alternative to "some countries going belly-up."

(Additional reporting by Catherine Bosley, Michael Stott and Lisa Jucca; Editing by Mark Heinrich)

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