Greece: Merkel and Sarkozy urge bail-out

The leaders of Germany and France have said that they want a new rescue package for debt-laden Greece to be agreed as soon as possible.

But Angela Merkel and Nicolas Sarkozy said any private sector involvement should be "voluntary" not compulsory.

They were speaking after Greece's Prime Minister, George Papandreou, appointed a new finance minister.

Evangelos Venizelos joined the cabinet as part of a reshuffle aimed at pushing through budget cuts.

It was unclear under what terms private investors might voluntarily take part in a Greek bail-out.

But the comments by Mrs Merkel and Mr Sarkozy were seen as a signal to banks and bondholders that they will not be made incur losses on Greek debt.

Germany and France had been at odds over whether private investors should be forced to share a greater burden to resolve Greece's debt crisis.

There were calls in Germany that investors should allow Greece extra time to pay off debts and should be made to participate in future fundraising by the Athens government.

Mrs Merkel is facing a backlash domestically over Germany's huge financial contribution to European bail-outs.

France's big three banks - Credit Agricole, BNP Paribas and Societe Generale - are heavily exposed to the Greek economy.

This week, ratings agency Moody's warned it may downgrade the three French banks because of their exposure to Greece.

After a meeting between Mrs Merkel and Mr Sarkozy in Berlin, the leaders said they were agreed on any private sector participation.

They stressed that a "voluntary" extension of maturities of Greek government bonds held by private investors should be part of that solution in order to ensure market stability.

"There are worries that we want to cause a credit event," Mrs Merkel said. "We do not want that. This is about a voluntary participation."

Rating agencies and the European Central Bank had warned that imposing a rescheduling of Greek debt on bondholders would count as a "credit event" - a partial default by Greece - sending panic through financial markets and intensifying problems in Portugal, the Irish Republic and Spain.

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The announcement from France and Germany eased tensions in financial markets.

Europe's main bourses initially extended their week-long falls on Friday and were down 1% in mid-morning trading.

But by midday, the share indexes in UK, France and Germany were back in positive territory. The futures indexes for Wall Street indicated that US markets will open higher.

A Spanish bond auction underlined the fears of contagion from the Greek crisis, with investors demanding a higher rate of return.

Although appetite for the issue was strong, the average rate demanded for the 15-year bonds was a euro-era high for Spain of just over 6%.

The yield on Spanish 10-year bonds is near an 11-year high, trading on the secondary market on Friday at 5.64%, just off the rate's peak of 5.70% on Thursday.

New finance minister Evangelos Venizelos will take over from George Papaconstantinou, a move that sparked a jump in Greek bank shares.

Although shares in Greek companies rose, with bank stocks up 4% at one stage, analysts were divided over whether the cabinet reshuffle would restore confidence.

Mr Papandreou wants to impose political stability as Greece awaits approval for the next tranche of bail-out money.

The European Union's top financial official, Olli Rehn, has indicated that Greece is likely to get its next round of funds in July if Mr Papandreou's government can pass new budget cuts and privatisations before the end of the month.

Greece needs a 12bn-euro loan to avoid defaulting on its debts due for repayment over the next few months.