Germany and France on Friday cleared the way for a second multi-billion euro rescue package for debt-laden Greece by reaching a compromise in their dispute over involving private creditors to share the costs of the planned bailout.
German Chancellor Angela Merkel and French President Nicolas Sarkozy said after a meeting in the chancellery in Berlin that they have agreed to involve private creditors in a new financial rescue on a voluntary basis.
Nearly two weeks ago, differences had erupted between the Europe's two largest economies over the issue.
Chancellor Merkel on Friday said that her country was now prepared to drop its demand that banks, investment funds and insurances should be forced to share the burden of rescuing their cash-strapped euro zone partner, which received a 110 billion euro (159 billion dollars) bailout from the EU and the
IMF a year ago.
"We agree to an involvement of private creditors on a voluntary basis", Merkel told reporters at a joint news conference with French President Nicholas Sarkozy.
She also indicated that an agreement among the 17 euro zone nations on the proposed rescue package -- ranging between 90 billion euros and 120 billion euros-- need not have to wait until September and the issue could be resolved even at the EU summit next week.
Media reports had earlier this week said Germany was seeking to delay a decision on a new rescue package until September to win the support for its proposal from all euro zone partners.
The terms and conditions of a new bailout must be worked out speedily by the European Commission together with the European Central Bank (ECB) and the International Monetary Fund (IMF), Merkel said on Friday, adding "We want a solution as speedily as possible."
President Sarkozy said France and Germany had identical position and opinion as far as defending the euro is concerned.
He spoke of his agreement with Merkel as a major breakthrough, which is based on the principles speedy and voluntary handling, avoiding a credit default by Greece and complete agreement with the European Central Bank.
Earlier, the European Commission had said on Thursday that despite the delay among leaders in reaching an agreement on a new bailout package, Greece will not become insolvent, as the euro zone finance ministers meeting in Luxembourg this Sunday will release the fifth tranche of 12 billion euros
bailout package.
This will prevent Greece from defaulting on its debt repayments due next month and ensure that it will remain solvent until September, EU Commissioner for Monetary Affairs Olli Rehn had said.
On Friday's announcement by Merkel and Sarkozy came as Greek Prime Minister George Papandreou reshuffled his cabinet, appointing Evangelos Venizelos as the new finance minister and tried to stabilise the political turmoil in order to pass new austerity measures crucial for the EU-IMF financial support.
The two leaders did not elaborate on what conditions private investors will be allowed to take part in a Greek bailout.
Until now, Germany had insisted that private creditors should be asked to exchange their Greek government bonds, which are maturing, for new bonds having a maturity of seven years as part of a soft rescheduling of Greece's debts.
Germany hopes that this will Greece more time to pay back its debts and to bring its finances under control.
However, this was fiercely opposed by several countries, including France, which feared that their banks having huge exposure to Greek debts will lose heavily as a result of debt write-offs and drop in interests which are bound to occur as part of the proposed soft debt rescheduling.
They warned that forcing private creditors to join a rescheduling of Greek debts could be seen as a partial default by Greece and could trigger a banking crisis in the euro zone.
The European Central Bank, which possesses Greek bonds--worth an estimated 47 billion euros-- had warned about a chain-reaction in the financial markets if private creditors were forced to make concessions.
France has the highest exposure to Greek debts in the euro zone with an estimated USD 56.7 billion and the country's three major banks Credit Agricole, BNP Paribas and Societe Generale have a share of more than USD 42 billion.
Earlier this week, crediting agency Moodys had threatened to downgrade the banks because of their deep involvement in Greek debts.
