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Euro zone leaders propose ‘European Marshall Plan’ for Greece

A new aid package for Greece was agreed Thursday as well as an overhaul of the currency bloc’s sovereign rescue fund.

BRUSSELS – The leaders of the Euro area met in Brussels yesterday in order to discuss the financial stability of the region as a whole and the future financing of the Greek programme.

According to a draft report leaked in Brussels, the euro-zone leaders have proposed a new aid package for Greece and an overhaul of the currency bloc’s sovereign rescue fund.

According to The Wall Street Journal, the overhaul will reduce the debt burdens of Greece, Portugal and Ireland and allow the European Financial Stability Facility (EFSF) to charge rates as low as 3.5 per cent, according to the draft. The maturities of the loans it makes will be extended from an average of 7.5 years to at least 15 years, the draft says. The EFSF will be given the power to recapitalize banks through loans to euro-zone governments – even governments that haven’t signed on to a bailout program, the draft says. It will also have the power to intervene in secondary markets for euro-zone sovereign debt, based on analysis from the European Central Bank and unanimity from the countries that participate in the EFSF.  The financial sector will choose from a “menu of options” on how to help finance Greece’s debt in the coming years, including debt exchanges, roll-overs or buy-backs, the draft says.

“We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole”, the draft report reads.

Euro-zone leaders earlier Thursday indicated they will no longer rule out selective default on Greece’s debt as part of the new bailout package, which is expected to include a bond-exchange program among other proposals.

Ahead of the meeting, German Chancellor Angela Merkel and French President Nicolas Sarkozy have hammered out a common position on the euro debt crisis, the BBC reports. A statement by the French president’s office said agreement had been reached after seven hours of talks in Berlin on Wednesday.

There were indications that a new tax on Europe’s banks to help fund any new aid packages may not be part of the deal. Arriving at the summit, the head of the Eurogroup of finance ministers, Jean-Claude Juncker, played down the bank tax idea. “I do not think there will be an agreement on that subject,” he said.

On Wednesday night, Greek PM George Papandreou held talks with European Commission President Jose Manuel Barroso. The talks lasted for one hour and thirty minutes and no statements were made afterwards. According to Radio Poland, while Greece is paralysed by transport strikes, Barroso has nominated Hirst Reichenbach, deputy head of the European Bank for Reconstruction and Development (EBRD) to implement reforms in Greece.

Senior euro-zone government officials indicated that avoiding default under the proposed bond swap plan would be difficult. Germany had previously insisted that private lenders to Greece should be forced to take losses as part of any further rescue deal for Athens. But this had been opposed by France and the European Central Bank, which fears it could spark a Europe-wide banking crisis, push Spain and possibly Italy into trouble, and even jeopardise the solvency of the ECB itself.

Nobody should be under any illusion; the situation is very serious”, European Commission president Jose Manuel Barroso European Commission President said in a statement released ahead the summit. “It requires a response. Otherwise, the negative consequences will be felt in all corners of Europe and beyond.”

Politicians and investors are calling for decisive action to help bring the crisis to an end.

President Barack Obama has also weighed in, calling Merkel on Tuesday night to stress the importance of tackling the debt crisis in sustaining the global economic recovery. The International Monetary Fund has also called on European leaders to take swift and decisive action. Delaying such action further would be “very costly” for the world economy, it said.

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