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Desperate hunt for deal to rescue debt-ridden Greece

Faced with the growing threat of global economic meltdown, the leaders of Germany and France buried their sharp differences over the worsening Greek debt crisis yesterday and issued an urgent call for EU agreement on a new rescue package for the financially stricken country.



Chancellor Angela Merkel and President Nicolas Sarkozy made their appeal after a three-hour meeting in Berlin to discuss the crisis as the Greek prime minister reshuffled his cabinet in an effort to show that his government could face down the political calamity provoked by his country's economic woes.

Insisting that both she and Mr Sarkozy wanted European agreement on a new rescue package for Greece at the EU leaders' summit at the end of next week, Ms Merkel said: “We have to find a solution as soon as possible. We have spent the whole of May and most of June discussing the same problem without reaching agreement.”

In an effort to calm the markets, both leaders pledged their support for the Government of George Papandreou. “I have spoken to him on the phone, he is ready to fight. I am very confident that Greece can master the crisis,” Ms Merkel said.

Greece needs an urgent installment of €12bn (£10.6bn) from its €110bn (£97bn) emergency loan granted last year to avoid defaulting on debts due for repayment over the coming months.

A fresh loan now being discussed by the eurozone could be worth as much as €100bn (£97bn). Although that appears to be a staggering amount, analysts believe that while the total cost of a full-scale Greek default is incalculable, domestic financial systems in Europe would be severely affected. French banks hold Greek debt worth €56bn (£49.4bn) and the German exposure is €34bn (£49.4bn) but the real fear lies in the unknown.

Yesterday's Franco-German summit had been preceded by major differences between the two countries. Ms Merkel had insisted that as part of any long-term solution, the banks should be obliged to buy back some of their loans to allow Greece more time to pay. But France strongly objected, arguing that it could destabilise its own banking industry. News of the German plan prompted the ratings agency Moody's to lower the credit rating this week of the three largest French banks — Credit Agricole, BNP Paribas and Societe Generale.

Ms Merkel and Mr Sarkozy appear to have buried the hatchet. They jointly announced that any private-sector involvement should be voluntary. Mr Sarkozy described her change of heart as a “breakthrough”.

Back in Athens Mr Papandreou's failure to secure a government of national unity meant that he was forced yesterday to turn to his main political rival in the ruling Socialists, Evangelos Venizelos, to shore up the Government.

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