Merkel cools hopes of big debt deal at eurozone summit

German Chancellor Angel Merkel talked down on Tuesday the chances that a eurozone summit will deliver a silver bullet at the debt crisis as governments scrambled to seal a new Greek bailout. "If you want to act responsibly, you know that such a spectacular step will not happen, including on Thursday," Merkel told a news conference after talks in Hanover, northern Germany with Russian President Dmitry Medvedev. The German leader voiced concerns that proposals to restructure Greece's debt mountain, create join euro-area bonds or form a transfer union were being bandied about to resolve the single currency area's year-long crisis. "This creates the impression that everything is going to be okay afterwards, that the issue of Greece and the issue of the euro can be put to one side," she said. After several turbulent days for the euro and European stock markets, the eurozone is racing to craft a second Greek bailout and prevent the crisis from dragging down bigger nations, with Italy and Spain in the firing line. Germany, the eurozone's paymaster, has been at odds with the European Central Bank and other governments over its insistence that private bond holders share the pain in the new rescue package for Greece. Senior government officials from eurozone nations are holding regular talks, including in Brussels on Tuesday, in the hope of reaching a deal by Thursday, one year after Greece received a bailout of 110 billion euros ($154 billion) from the European Union and International Monetary Fund. Late on Monday, a special tax on eurozone banks emerged as a potential compromise after governments had struggled for weeks to agree on involving the private sector in the second bailout without triggering a devastating default. The French Banking Federation voiced concerns about the idea, saying it was a "strange logic." French Finance Minister Francois Baroin, however, said he was confident a deal will come through at the summit. "There are a lot of discussions on the telephone. People are working hard on a solution which allows -- and this is the aim of France's position -- the avoidance of a (sovereign) default or a credit event," he said Monday. Germany, Finland and the Netherlands want banks, insurers and other private investors bear some of the burden rather than just leave it to the taxpayer to stump up again. The ECB and other eurozone states are opposed because forcing private investors to effectively take losses on their holdings of Greek government bonds would amount to a default. "A credit event, selective default or default must be avoided," ECB president Jean-Claude Trichet told the Slovak daily Hospodarske Noviny. "We ask the eurozone governments to find appropriate solutions as soon as possible," he said, repeating ECB warnings that the bank will cease financing the Greek banking sector if the rescue puts Athens into default. But an ECB governor, Ewald Nowotny, broke ranks, telling CNBC television that proposals that would trigger a "short-lived selective default" should be studied because it "would not really have major negative consequences." France had suggested that the banks could participate on a "voluntary" basis but credit ratings agencies said that this would not avert a default rating. French European Affairs Minister Jean Leonetti said on Monday the bank tax proposal "would have the advantage of not involving the private banks directly and so avoid the problem of a potential default." EU officials have also mooted a convoluted plan to lend Greece money with which it can buy back its own debt at a reduced price on secondary bond markets, effectively postponing its repayments to give it breathing space. Merkel has made clear she wants a deal on the table by Thursday after she forced EU president Herman Van Rompuy to cancel plans for a meeting last Friday following a raucous week in the markets. She even warned at the weekend that she would attend Thursday's summit only if a concrete result was in the offing, but her spokesman indicated that she would go to Brussels after all.