BRUSSELS — European leaders were poised to sign off on a second bailout for Greece on Thursday, even at the cost of making the country the first euro state to partially default on its debt.
With the new rescue program, leaders want to "address the problems really at the root," by lightening the country's debt burden and restoring its economic competitiveness, German Chancellor Angela Merkel said as she arrived at an emergency summit in Brussels.
That will include getting private creditors to contribute to new aid, a move that would put Greece in so-called "selective default," a partial renege on its debt deals.
Economists worry that a default, even if only temporary, could rock markets if not accompanied by substantial new financial support from the eurozone and a significant decrease in Greece's debt burden.
Dutch finance minister Jan Kees de Jager said objections "to avoid a selective default ... have been swept from the table." Speaking to lawmakers in The Hague, de Jager said the plan for Greece would "do something for the debt duration and also lower the debt burden."
The admission that a default was likely caused a slump in the euro, which by early afternoon was down 0.8 percent at $1.4150, having traded near $1.43 earlier in the day.
After being granted €110 billion ($156 billion) in rescue loans last year, Greece needs tens of billions more as its economy continues to struggle and it can't raise money on international markets.
Few economists believe that even with more support, Greece will be able to repay its debt — some €340 billion ($483 billion) — without some kind of cut to the overall value.
However, so far the eurozone has ruled out forced haircuts on Greece's debt, fearing that it would heighten panic on financial markets and destabilize larger economies like Italy or Spain.
Instead, the 17-country currency union has been working on an alternative support plan that will see banks and other private investors give Greece more time to repay its bonds, while the eurozone and the IMF will continue to prop up the country with rescue loans.
Those loans should come under conditions that bailed out countries can actually afford, said Austrian Chancellor Werner Faymann, implying that EU and IMF rescue loans will likely get lower interest rates and longer maturities.
But rating agencies have warned for weeks that any form of private sector involvement in a bailout, even if voluntary and without a haircut, would be seen as a "selective default" — a rating that has never been held by a country while in the eurozone.
Luxembourg Prime Minister Jean-Claude Juncker said Thursday that he could not exclude that a Greek deal will trigger such a rating, although everything should be done to avoid it.
A "selective default" rating implies that terms of a bond, such as the repayment deadline or interest rate, have been altered. It falls short off an outright "default" rating, which is usually triggered when the borrowing country or company doesn't pay back the whole amount it owes.
However, even a temporary "selective default" rating complicates the eurozone's efforts to save Greece, because the European Central Bank has threatened to no longer accept bonds with such a rating as collateral for its liquidity support. That would freeze out Greek banks, which rely on the ECB for their survival, and will likely require the eurozone to come up with alternative solutions to prop up the country.
For a few days this week, the eurozone had hoped that it could stay clear of a selective default rating by instead recouping some of the money they spend on new loans for Greece through a tax on financial institutions. Yet that plan, strongly opposed by banks that don't hold Greek bonds, did not survive last-ditch talks between Merkel and French President Nicolas Sarkozy Wednesday night.
"I have the impression that there is no agreement on a banking tax," said Juncker, who as the chairman of the Eurogroup is also one of the main spokesmen for the currency union.
Merkel said she and Sarkozy had listened closely to the concerns of European Central Bank President Jean-Claude Trichet, who joined them for part of their meeting Wednesday night in Berlin.
While Austria's Faymann and Belgian Prime Minister Yves Leterme expressed hope that a deal based on the Franco-German position could be found Thursday, some countries appeared reluctant to sign off just yet.
The Franco-German position does not include specific figures on the value of private sector involvement, said a eurozone official, and therefore countries including the Netherlands and Finland are not yet ready to give their approval. The official spoke on condition of anonymity because discussions between leaders had just started.
Toby Sterling in Amsterdam contributed to this report.