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Europe solution on hold

business Updated: Oct 21, 2011 22:25 IST
Agencies
German Chancellor Angela Merkel

European leaders have put off crucial decisions on how to stop a sovereign debt meltdown in their currency zone, keeping markets on edge, to give German Chancellor Angela Merkel time to secure parliamentary support, EU sources said on Friday.

Leaders of the 17-nation euro zone will now hold a second summit next Wednesday to thrash out the toughest issues of how to maximise the bloc's financial rescue fund and how to reduce Greece's debt, because Merkel will not be empowered to conclude agreements when they meet in Brussels on Sunday.

The German leader stuck to her guns on Friday in rebuffing French pressure to make wider use of the European Central Bank (ECB) in leveraging the EFSF bailout fund. France argues this is the most effective way of fighting a crisis that began in Greece, spread to Ireland and Portugal and now threatens bigger countries.

Franco-German split
Berlin and Paris, Europe's two main powers, remain split on how to scale up the €440-billion ($600) EFSF bailout fund to prevent bond market contagion spreading to Italy and Spain, the bloc's third and fourth largest economies.

France fears its credit rating could come under threat if the wrong method is chosen.

Ratings agency Standard & Poor's said on Friday it is likely to downgrade France and four other states if Europe slips into recession.

There are also differences between Germany and France and between the EU and the International Monetary Fund over how deep a write-down banks and insurers will have to take on Greek bond holdings to make that country's debt sustainable.

Paris and Berlin called on Thursday for negotiations to start with the private sector over its contribution to a sustainable plan for Greece's debt.

Austerity the best?
Austerity measures in Greece which have sparked violent protests are nevertheless the "best" way for the country to recover from its desperate debt crisis, outgoing ECB chief said on Friday.

"The measures that are taken are the best way to put progressively the people of Greece in a better situation, both in terms of growth and in terms of jobs," Jean-Claude Trichet, ECB president, said.

(Wih Reuters & AFP inputs)