President Barack Obama on Tuesday urged euro zone countries and bondholders to make tough decisions to contain Greece's debt crisis while the International Monetary Fund said more work was needed for Athens to receive its next block of bailout aid.
Obama, appearing at a joint news conference with German Chancellor Angela Merkel, said the United States would be supportive, but put the onus for action on Europe and called Germany a key leader in resolving the crisis.
Greece's high debt level means that other countries in the euro zone are going to have to provide them a backstop and support, Obama said. And frankly, people who are holding Greek debt are going to have to make some decisions, working with the European countries in the euro zone, about how that debt is managed.
Obama and Merkel said they discussed the Greek debt crisis extensively during the German leader's official visit in Washington.
Plans are taking shape for a second international bailout of Greece, with a three-year package worth 80 to 100 billion euros set to be ready in the next two weeks, euro zone official sources said.
The plan aims to avoid a costly default and restructuring of Greece's 340 billion euros ($499 billion) of sovereign debt, but some European politicians are demanding that bondholders share part of the burden of keeping Greece solvent.
Obama pledged to cooperate with Europe and the IMF on solutions that also give Greece a chance to grow its economy, and suggested that a Greek default could send shock waves that could damage a U.S. economic recovery that has shown signs of faltering.
We think that America's economic growth depends on a sensible resolution of this issue. We think it would be disastrous for us to see an uncontrolled spiral and default in Europe, because that could trigger a whole range of other events, Obama said.
Merkel, who is under political pressure at home to avoid being the financial savior for struggling European countries, said Germany understood its central role.
We've seen that the stability of the euro as a whole will also be influenced if one country is in trouble, she said.
So we do see clearly our European responsibility and we're shouldering that responsibility, together with the IMF.
MORE WORK NEEDED
In Athens, a senior Greek official said the government expected parliament to vote by the end of June on its medium-term austerity plan, a condition for the new package as Athens struggles to avoid defaulting on its debt.
But Bob Traa, the International Monetary Fund's senior representative in Greece, said the European Union needed to do more work before the Fund's board could release more loans.
I believe there is a summit in Europe, in June, where some hard nuts need to be cracked. They need to make some decisions, and then we will go to our board and disburse in early July, he told a banking conference.
A team from the IMF, EU and European Central Bank reached an agreement on Friday, under which Athens would impose more austerity and faster privatization to cut its budget deficit.
Greece agreed a 110 billion euro ($160 billion) rescue with the EU and IMF a year ago. But this assumed Athens could resume borrowing commercially in early 2012, which is not now feasible as yields on Greek debt are sky high in the secondary market.
Details of the new deal to supercede the May 2010 rescue have yet to be worked out, but it assumes Greece's funding needs will be covered by a mix of new EU and IMF loans, budget deficit cuts including tax increases and state asset sales, and a voluntary participation by private creditors.
One possibility is that creditors would agree to buy new Greek bonds when bonds they are currently holding mature, meaning Athens would not have to find cash for repayment.
Slovakia said on Tuesday it would not approve fresh aid for Greece unless private investors bore part of the burden.
But credit rating agency Moody's said it was hard to see how a private sector rollover of Greek debt could be truly voluntary, and that such a move would therefore probably constitute a credit event -- a ruling that would have far-reaching market repercussions such as triggering payouts on financial instruments used to insure against default.
It's hard to imagine in the current circumstances that people would voluntarily do this, Bart Oosterveld, managing director of Moody's sovereign risk group, told reporters in Paris. Our default definition contemplates that for something to be voluntary it has to be truly voluntary ... More likely than not this would be a credit event in our view.
The IMF's Traa warned that a major restructuring of Greek debt would create untold problems in the euro zone but hinted that the Fund was open to other solutions.
Stretching out payment terms, for instance in loans from euro area partners and the IMF, is a reasonable thing to think about because we have amortization right at the end of the program. This is a technical issue we can think about, he said.
(Additional reporting by Andreas Rinke, Lefteris Papadimas Ingrid Melander, George Georgiopoulos and Renee Maltezou; writing by David Lawder and David Stamp; Editing by Eric Walsh)