The European Central Bank is willing to let Greece slip into temporary default as part of a crisis response that would involve a bond buyback but no new tax on banks, EU sources said on Thursday.
German Chancellor Angela Merkel and French President Nicolas Sarkozy crafted a common position on a second Greek bailout in late night talks in Berlin with ECB President Jean-Claude Trichet, sources in both governments said.
Minds have been concentrated by the danger Europe's debt crisis could engulf the much bigger economies of Spain and Italy. Greece, Portugal and Ireland have already succumbed.
Merkel told reporters on arrival in Brussels for a crucial euro zone summit: "I expect that we will be able to seal a new Greece program. This is an important signal. And with this program we want to grasp the problems by their root.
She gave no details but Dutch Finance Minister Jan Kees de Jager said a short-term or selective default for Greece, previously opposed by the ECB, was now a possibility.
"The demand to prevent a selective default has been removed," he told the Dutch parliament.
So it turns out that of the three parties I talked about earlier involved in the Greek bailout (the ECB, Germany, and the rating agencies) one of them had to eat My Big Fat Greek Crap Sandwich. It looks like Zero Hedge called it and the ECB is the is the big loser, followed by Germany.
Hopefully details will be forthcoming, but any plan that involves a technical default means the EU is now 100% committed to fighting the Greek Fire. If they can't put it out -- and there's no reason to believe they will be able to -- then the game's over on the EU side.
More on this as we get details.
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