European paymaster Germany stuck to its guns on Friday in demanding that private investors contribute to a second bailout for Greece despite a European Central Bank warning against triggering market turmoil.

Finance Minister Wolfgang Schaeuble urged parliament to back additional aid for the heavily indebted euro zone country but said private creditor participation in a new package was unavoidable and reiterated he favored a bond swap that would push out Greek debt maturities by seven years.

The Bundestag lower house approved a non-binding resolution supporting extra emergency loans to Greece, but only on the condition that bondholders be made to share the burden.

Germany received backing for its stance from the Dutch, whose Prime Minister Mark Rutte said he viewed Berlin's debt proposals favorably.

If there are doubts about the ability of Greece to pay back its debt and we must win time with a new package, then the participation of the private sector in the solution is unavoidable, Schaeuble said in a speech to parliamentarians.

At a Brussels summit on June 23-24, European Union leaders are due to finalize a new rescue package for Greece that officials say will total 120 billion euros and ensure the country is funded through 2014.

Half of that sum would come from the EU and IMF, with the remainder equally divided between privatization receipts and a contribution from the private sector, but deep divisions remain about how to get the banks that hold Greek debt on board.

A deal would not help reduce Greece's massive 340 billion euro debt load, but it would give the country more time to implement economic reforms and return to growth.

Still, many economists believe Athens will struggle to avoid a harsher restructuring in the years ahead that imposes forced losses of 50 percent or more on holders of its debt.

The risk premiums on peripheral euro zone sovereign bonds rose on Friday as investors fretted over the lack of consensus just two weeks before the summit.

But European Council President Herman Van Rompuy, who will chair the EU summit, said he was confident there would be an agreement on a new package for Greece by the end of the month, creating no default or credit event.

Schaeuble dismissed criticism of his bond swap plan, telling lawmakers it was a fair solution that would protect taxpayers.

This would give Greece the necessary time to carry out reforms and win back confidence, he said.

It would limit the risks of a negative market reaction, establish fair burden-sharing between taxpayers and the private sector and send a clear signal to all that losses cannot be pushed on to taxpayers alone.


ECB President Jean-Claude Trichet made clear on Thursday the central bank opposed any scheme for private sector involvement that would cause a credit event or be considered by credit ratings agencies as a selective default.

Reflecting the sensitive nature of the debate within the ECB, Trichet's deputy Vitor Constancio was forced on Friday to retract comments made earlier in the day in which he said his boss was not ruling out an extension of Greek maturities.

In a clarification statement issued by the ECB, Constancio parroted the stance Trichet laid out at his Thursday news conference, saying that he excluded all concepts that were not purely voluntary.

The ECB is concerned that tinkering with Greek debt may set off a chain reaction in financial markets that would stretch far beyond Greece and undermine the creditworthiness of other stressed euro zone sovereigns.

The international body that adjudicates on events that could trigger the payout of default insurance has said it would not typically regard a voluntary bond swap or a rollover of maturing debt as a credit event.

However, all three major ratings agencies have said they would be likely to classify even an ostensibly voluntary debt swap as a selective default, since it was hard to imagine a rational investor maintaining Greek exposure without coercion.

Trichet's German colleague at the ECB, Juergen Stark, said he was personally in favor of private sector involvement but noted that feedback from the ratings agencies over the past weeks had changed the situation.


The ECB has warned it will reject Greek bonds as collateral in its liquidity operations, a step that would leave Greek banks stranded, if debt moves sparked a credit event. But many analysts doubt the central bank would take that risk.

Clemens Fuest, an academic adviser to the German finance ministry, said the ECB had backed down in past stand-offs in the debt crisis and was likely to compromise now. [ID:nLDE7590OV]

The language is stark at the moment, but if we look back, the ECB has bought government bonds during this crisis to fight the crisis, so it is already a party in the crisis and it has deviated from the very strict and clear rules for normal situations, Fuest told Reuters Insider TV in an interview.

I think in the end the ECB will be ready to compromise.

France favors a less sweeping form of private sector involvement in which bondholders are asked to commit voluntarily to roll over their Greek bonds when they mature, sources familiar with government thinking say.

French President Nicolas Sarkozy will hold talks with Merkel on the euro zone crisis next Friday in Berlin in what could be a decisive meeting between Europe's central powers a week before the EU summit.

Schaeuble acknowledged the ECB was opposed to his ideas for private sector involvement in a Greek solution, but said euro zone ministers had agreed to set up a working group to work on a solution that avoided negative market consequences.

In Athens, Greek Prime Minister George Papandreou defended a new austerity package from attacks in parliament, saying it was the only way the EU and IMF would rescue Greece from bankruptcy.

No prime minister of any country wants to go out with a beggar's tray and collect money from other countries ... I certainly don't, but I do it for Greece, Papandreou said.

(Additional reporting by Lefteris Papadimas in Athens, Erik Kirschbaum and Christiaan Hetzner in Berlin, Nick Edwards in Frankfurt, Kirsten Donovan in London and Daniel Flynn in Paris; writing by Paul Taylor; editing by Mike Peacock/Ruth Pitchford)