Government officials and commercial bankers remained divided over competing policy proposals on Monday as Europe struggled to put together a second bailout for Greece and prevent the region's debt crisis from spreading.
French government spokeswoman Valerie Pecresse said she believed a summit of the eurozone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year.
But after three weeks of preparatory talks, it was unclear whether a consensus could be reached on a way for private owners of Greek government bonds - banks, insurers and other investors - to contribute to the bailout by taking cuts in the face value of their holdings.
Fears that the rescue might fail, leading eventually to a disorderly debt default by Greece, pushed the euro down against other currencies while the government bond yields of highly-indebted eurozone states rose. Italy's 10-year yield climbed 0.2 percentage point to a euro-era high.
Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing fast.
"I'm afraid to hope. I still hope, yes, but I'm not optimistic," he said.
"We've had solutions in the past, but we haven't grasped them. Now it's too late for some of those solutions to work any more; the opportunity has been lost." Officials are wrestling with a range of proposed schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a voluntary buy-back or swap of Greek bonds, or possibly both. The schemes would be conducted at a discount to the bonds' face value, helping to reduce Greece's 340 billion euro mountain of sovereign debt.
But all of the schemes could face technical and legal obstacles, in some cases requiring the approval of national parliaments in the eurozone. Other proposals still appear to be on the table; Germany's Die Welt newspaper reported that governments were considering a levy on banks as a way to involve private creditors in rescuing Greece.
An official of a major eurozone government who is familiar with the talks said he had not heard of a proposal for a bank levy, but added: "There are at the moment so many proposals that you cannot rule out anything."
An official European Union source told Reuters that it was likely the EFSF would be used to lend money to Greece to buy back its own bonds. But this by itself would not nearly be enough to solve the problem.
Guntram Wolff, deputy director of the Bruegel think tank and until earlier this year a senior economist at DG Ecfin, the European Commission unit handling the crisis, said a buy-back might cut Greece's debt by as little as 20-30 billion euros.
Analysts have estimated the debt would have to be roughly halved, to 80 percent of gross domestic product, to make it manageable in the long run.
A bond swap might have more impact but Wolff said he did not think Europe was close to agreeing on a large-scale swap. German insurance giant Allianz, for example, has suggested that private investors write off 25-30 percent of their Greek debt via a swap, German media reported; the market prices of many Greek bonds are now near half of face value.
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