Debt-Crisis Summit Aims to Bridge Divide

The Wall Street Journal

By MATTHEW DALTON And RIVA FROYMOVICH

WROCLAW, Poland—Euro-area finance ministers will gather here Friday to seek agreement on several crisis-fighting measures left unresolved despite weeks of talks, amid mounting worries that governments lack the political will to prevent financial catastrophe from striking the southern euro zone.

This is the first meeting of finance ministers since a July 21 accord by heads of government to expand the 17-member bloc's bailout fund, the European Financial Stability Facility, and extend a second round of lending to Greece.

Implementation of the deal has been held up by sparring national interests, most notably a demand by Finland for Greek collateral that has led other member states to ask for the same.

The euro zone's failure to quell the debt crisis has sparked frustration from the International Monetary Fund and the U.S. and volatility in financial markets.

U.S. Treasury Secretary Timothy Geithner will attend Saturday's meeting of the Economic and Financial Affairs Council, representing the 27 EU finance ministers, for the first time. He is expected to plead with the Europeans to take more decisive action to prevent Greece's debt problems from infecting banks across Europe and possibly spreading to the global financial system.

Europe's banks are increasingly relying on the European Central Bank for funding, finding it difficult to borrow dollars as U.S. institutions pull back capital in response to the region's escalating debt crisis.

The tightening liquidity comes as fears have spiked that Greece could default and be kicked out of the euro zone, which EU leaders have said could have severe political and economic consequences for the entire European Union.

Markets took some comfort from a statement by German Chancellor Angela Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou, who said after a three-way call Wednesday night that "the future of Greece is in the euro zone." That appeared to raise hopes the governments would agree to disburse the next tranche of aid due to Greece, despite new data showing the country isn't on track to meet budget targets agreed with the EU and the International Monetary Fund.

Talks on Finland's collateral demands have focused in recent weeks on a plan to provide noncash, Greek government assets to countries willing to pay for it; officials are discussing whether that should happen through cash sent to the EFSF or reduced payments of the EFSF's profits.

But the plan isn't likely to be ready for sign-off at this week's informal gathering in Poland, euro-zone officials said. Officials are still trying to ensure that "negative pledge" clauses in some Greek bond contracts—which prevent any creditors from getting favorable treatment—wouldn't be triggered by Greece handing over collateral to some euro-zone governments, one official said.

The July 21 agreement calls for the EFSF to get new powers, including the ability to buy sovereign debt in the secondary market and lend money to governments to recapitalize their banks. The deal is also contingent on Greece's private-sector creditors agreeing to exchange their bonds maturing before 2020 for longer-dated bonds, providing €135 billion in additional financing to the country.

Those elements have proved to be stumbling blocks. Negotiations between the financial institutions that own Greek debt and the government may not yield the targeted amount, officials warn. Meanwhile, opposition to the agreement in national parliaments is rising: Members of Germany's national parliament have threatened to oppose changes to the EFSF, and Slovak Parliament Speaker Richard Sulik said he would fight to delay a vote on expanding the EFSF, at least until the end of the year.

Austria's parliament Wednesday rejected a government attempt to fast-track the vote, which now isn't expected before October.

Olli Rehn, the EU's economic policy commissioner, said Wednesday that he expects the ministers in Poland to "overcome remaining hurdles and get the job done."

"Growth and unemployment are now under extreme pressure from the negative ramifications stemming from the continued market turbulence related to the sovereign debt crisis," Mr. Rehn said Wednesday. "We must be much better in the implementation of our decisions."

The U.S. and China are asking for the same. In interviews last week, Mr. Geithner said he would like to see more political will from European leaders to end the sovereign-debt crisis. Mr. Geithner said it was "absolutely" in the U.S.'s interest that the euro survive as a currency.

Meanwhile, Chinese Premier Wen Jiabao voiced support for Europe Wednesday, but offered no new specific help for the debt-battered continent.

Write to Matthew Dalton at Matthew.Dalton@dowjones.com and Riva Froymovich atriva.froymovich@dowjones.com