Eurozone Leaders Meet For Crucial Debt Talks

Alex Rossi, Europe correspondent, in Brussels

Eurozone leaders will later meet for an emergency summit to thrash out a solution to the Greek debt crisis that threatens to bring down the euro.

The 17 leaders of the eurozone countries have been urged to "do what it takes" to salvage the single currency after a torrid few weeks on the markets.

If they conclude that Greece will have to default on some of its debts, analysts warn that Britain will feel the impact.

UK banks could lose an estimated £2.5bn invested in Greek government bonds, while Britain may face higher rates of interest on its own national debt as investor confidence in EU financial security is eroded.

Earlier, France and Germany agreed on a common strategy for tackling the problem, which is thought to involve the participation of the banking sector.

However, eurozone sources said this morning a proposed banking sector tax had been dropped from the deal.

The president of the European Commission has warned all eurozone leaders they must find a way forward.

EC president Jose Manuel Barroso said leaders should not be under any "illusion" and warned a failed response will have "negative consequences which will be felt in all corners of Europe and beyond".

The warnings of a doomsday scenario are creating a great deal of expectation that a solution for the debt crisis may finally be in reach.

But German Chancellor Angela Merkel, leader of the Europe's largest economy, has warned that people should not expect miracles.

"If you want to act responsibly you know that such a spectacular step will not happen, including on Thursday," she said.

Euro Summit Is 'Make Or Break'
Politicians must decide how much EMU (European Monetary Union) is worth and whether they are committed to saving it and Thursday's emergency summit could prove to be a make or break opportunity, not only for EMU, but also for the euro.

Eurozone leaders need to find a solution to Greece's troubles, which includes how a second bailout will be arranged and, more importantly, who will pay for it.

There has been resistance to a taxpayer-only loan in Germany, the Netherlands and Finland, where leaders argue that investors should also shoulder the burden.

It is a position which has spooked the markets as no one really knows how big the hit will be and whether it sets a precedent for other European countries facing economic trouble.

Markets around the world are now demanding firm action, but it is not clear if Europe's leaders are capable of achieving that.

She said national interests have turned an economic problem into a political crisis for the European Union.

"The decisive action that the markets would react well to would be the creation of Eurobonds which is unlikely to be discussed, let alone agreed on, as taxpayers in wealthier European countries are unlikely to want to pay for their poorer neighbours in other parts of Europe," she said.

It comes as Conservative MP Michael Fallon told Jeff Randall Live Europe was "getting closer to Armageddon".

He added: "What is dangerous about this situation is that there seems to be a real absence of political leadership amongst the eurozone countries and we stand to lose from that as much as the countries that are inside the euro area."

However, former IMF executive director Onno de Beaufort Wijnholds said there may be ways out of a default.

Mr Wijnholds told Jeff Randall: "Default is not absolutely necessary.

"There has been a lot of discussion in recent days about how to find solutions that would not require an outright default."

 
The debt crisis has caused riots in Greece

The crisis has taken on a frightening new dimension over the past few days as the economic contagion spread from the periphery to core economies like Italy.

The cost of borrowing has risen above 6% and Italy has enormous levels of sovereign debt - with 7% and beyond seemingly the unwelcome magic number at which the cost of borrowing becomes unsustainable.

Leaders will therefore be working towards a communique that at least gives a sign they have an answer to the growing financial turmoil.

If they fail, many analysts say the crisis will simply worsen and the euro could eventually break up. news.sky.com