Sarkozy and Merkel hammer out Greek deal 'Vienna style'

Under pressure from the French, Germany yesterday backed down on its demand that private creditors share the burden of a further bailout for Greece, a stipulation that had threatened to derail the entire process and throw the eurozone into further crisis.

As Greek premier George Papandreou replaced his finance minister in a bid to soften opposition to new austerity measures, German chancellor Angela Merkel and French president Nicolas Sarkozy announced they had reached common ground on the delicate topic of involving Greece's bondholders, calming fears Germany wanted to shift losses onto private creditors.

Eurozone finance ministers earlier this week failed to reach a deal on a second set of rescue loans necessary to save Greece from defaulting on its massive debts amid divisions over the role of banks.

In recent weeks, Mrs Merkel had backed her finance minister's calls for banks and other private bondholders to give Greece an extra seven years to repay its bonds. Rating agencies and the European Central Bank, however, warned such a move could count as a "credit event," a partial default by Greece that could spread panic on financial markets and hurt Greek banks.

After the meeting, Mrs Merkel indicated she now favoured a so-called "Vienna-style" agreement, which had previously received support from the ECB and France.

Under such a deal, banks and other private investors would commit to maintaining their exposure to Greece by buying new bonds as old ones expire and keep their Greek banking subsidiaries afloat. That type of bond roll-over would likely have to come with some tweaks, as market interest rates on Greek bonds are currently way above what Athens could afford.

"It is about a voluntary participation of the private sector, and for that the 'Vienna-style,' as it is called, is a good basis and I think that we can use it to move forward," Mrs Merkel said. Mr Sarkozy said "relatively precise principles" for the private-sector involvement would now have to be fixed, adding: "This can be put into place relatively quickly."

The Franco-German announcement on private creditors was reminiscent of a similar bilateral deal last autumn, when the two leaders set out the cornerstones of new pan-European fiscal rules and a permanent bailout mechanism.

Mr Sarkozy added: "I believe that this meeting … again shows the power of the Franco-German couple."

Meanwhile in Athens, Mr Papandreou moved defence minister Evangelos Venizelos to the post of finance minister, jettisoning George Papaconstantinou, architect of an austerity programme that has provoked unrest and his Socialist Party to revolt. The move seemed likely to buy time for the embattled premier, but did little to dilute scepticism that Greece would be able to implement a new round of deeply painful reforms.

The European Union and International Monetary Fund have made a new bailout for Greece, estimated at €120 billion (106bn), conditional on Mr Papandreou's five-year package of cuts and tax hikes worth €28bn.

Greece's political upheaval and three weeks of protests have pounded markets and drawn criticism from other EU states, where policymakers have dithered over how best to keep funding Greece and forestall a disastrous "credit event".

EU officials lined up to urge Greek leaders to stop playing politics and get behind the reform plan, however painful. "This is no time for party politics, there is too much at stake," European Council president Herman Van Rompuy said in Dublin.

Mr Papandreou told his new cabinet they had the resolve to push through reforms and save the Greek economy.

Mr Venizelos said he had hesitated before accepting the post but added: "The country must be saved and will be saved."

Mr Papaconstantinou becomes environment minister in the reshuffle. The new cabinet was sworn in by Orthodox priests in traditional robes yesterday. A confidence vote is due to be held before Wednesday.

Cabinet shuffle to buy time in Greece

Greece's new finance minister Evangelos Venizelos is close to a group within the ruling Socialist Party unhappy with austerity plans, as is new deputy finance minister Pantelis Oikonomou.

By bringing critics into the government, Mr Papandreou may, at least for now, have deflated a party revolt that led three Socialist deputies to resign this week.

Mr Oikonomou, previously an outspoken critic of the bailout, said after the reshuffle that the government must succeed.

"This buys Papandreou just a little time. By putting Oikonomou and Venizelos in government, he makes sure the mid-term budget plan will pass. But this just delays his problems," said ex-finance minister Stefanos Manos.