BERLIN — The eurozone's economic powers are struggling to agree on a new debt crisis plan to present at an emergency EU summit, with Germany downplaying calls from France and Brussels for a big announcement that could boost market confidence and contain the turmoil.
French President Nicolas Sarkozy was flying to Berlin on Wednesday afternoon in an apparent last-minute bid to strike a deal with Chancellor Angela Merkel on some kind of new aid package for Greece.
The stakes are high. Markets have been extremely volatile over the past weeks on fears the crisis might spread to larger countries like Italy. The International Monetary Fund warned that leaders must do more to keep debt troubles from poisoning the entire continent's economy.
Germany and France will discuss "all the options on the table and agree, if possible, on a joint position," said Merkel's spokesman, Steffen Seibert. Germany is optimistic that Thursday's summit will agree on "a good solution that will move us forward," he added.
But he reiterated Merkel's stance that the talks will not yield a "spectacular solution" that fixes Greece's problems quickly, but will be merely a stepping stone in a longer process. Merkel had said there would be no decision to restructure Greece's debt or create eurobonds that link debt across countries.
The French government and the European Commission, however, warned that it was urgent that the EU come up with a significant deal.
French Finance Minister Francois Baroin told France-Info radio that "there should be a strong message tomorrow, from the highest level."
European Commission president Jose Manuel Barroso said "nobody should be under any illusion, the situation is very serious."
He said that at the very least, leaders need to present how they will make Greece's debt sustainable, under what terms private creditors will have to contribute to a new bailout for the country, and what new powers to give to their bailout fund.
European leaders have faced criticism for their slow, piecemeal efforts to stem the debt crisis.
The IMF urged European leaders to act more boldly, warning that there is "no consistent roadmap ahead" and that this could produce "possible significant regional and global spillovers."
In a report it accused governments of "retrenchment, threatening to turn back the clock on economic and financial integration."
"Market participants remain unconvinced that a sustainable solution is at hand," the report said. "Limiting any further damage is now crucial."
Borrowing rates have risen particularly sharply in Italy and Spain and while they eased slightly a day ahead of the summit, sentiment remains fragile as investors see no immediate way through Europe's policy stalemate.
Merkel has opposed a restructuring of Greece's debt that would force losses upon private sector creditors as well as any notion of creating eurobonds — debt that links different countries together.
Such jointly guaranteed bonds for the entire eurozone would make borrowing cheaper for countries with shaky finances but more expensive for nations with a top rating such as Germany. Unsurprisingly, Berlin is the main country to oppose such a measure.
Germany and France stressed that both nations must seek a joint position to make the summit of the 17 eurozone nations' leaders a success.
"Germany and France — as Europe's unification has shown — must reach an agreement, if that doesn't happen Europe does not advance," Merkel's spokesman Seibert said.
So far, discussions on the contribution of private creditors have revolved around three options, according to a paper from a eurozone officials' working group dated July 16.
The first would see the eurozone's bailout fund finance a buyback of Greek government bonds at their current distressed prices, paired with guarantees that the remaining bonds would be repaid. That option would give the Greek state the biggest short-term relief, but may be the most expensive for the eurozone.
The eurozone would not only have to fund the buybacks and repayment guarantees, but the paper says they would likely be seen as a default by rating agencies. That would force the eurozone to come up with the liquidity support for Greek banks that would be cut off from the European Central Bank's financial lifelines.
The second option reverts to a proposal made by French banks several weeks ago. Banks would reinvest part of the money they collect from maturing Greek bonds into new bonds with long repayment deadlines.
However, that proposal would still trigger a "selective default" rating, requiring liquidity and capital support for Greek banks. It would provide significant short-term relief for Greece, the paper says, but should come with lower interest rates and longer maturities for the eurozone loans.
The third option is the only one that would avoid a default rating, but will likely run into huge opposition from banks that don't hold Greek bonds. It proposes a tax on the financial sector to recoup part of the cost of rescuing Greece. However, it would only result in small short-term relief for Greece.
By the time the leaders' top advisers meet Thursday morning ahead of the summit, the paper will most likely be narrowed down to two possible plans: one that would trigger a default — a combination of option one and two — and one that won't, said a eurozone official. The official was speaking on condition of anonymity, because talks were still ongoing.
Greece, meanwhile, is struggling to reduce its budget deficit from 10.5 percent of Gross Domestic Product in 2010 to 7.5 percent this year as it implements harsh austerity measures that have pushed the country into recession.
Data released Wednesday showed revenues €3 billion in arrears, with the January-June deficit reaching €12.7 billion on a fiscal basis — against a budgeted €10.3 billion.
"Tomorrow's summit will determine the future of the country and of Europe," government spokesman Elias Mossialos said in Athens.
Gabriele Steinhauser in Brussels and Nicholas Paphitis in Athens contributed to this report.