France, Germany want closer control of Greek funds

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By SYLVIE CORBET, Associated Press

PARIS (AP) — France and Germany on Monday sought to impose tighter controls on Greece's finances and warned political leaders in Athens to agree on new austerity measures soon if they didn't want to see their country go bankrupt.

President Nicolas Sarkozy of France and German Chancellor Angela Merkel said Greek leaders need to push through reforms in order to obtain new funds in a second planned bailout worth euro130 billion ($171 billion).

The country needs the money to repay a bond coming due in March. But Greek party leaders have been unable to agree to the new measures, missing multiple deadlines in the negotiations, and delayed their latest meeting to Tuesday. Financial markets remain on edge as investors await the outcome of the talks.

"Something has to happen quickly," Merkel said. "Time is pressing and for the entire eurozone much is at stake."

In a sign of their lack of confidence in the Greek politicians, Sarkozy and Merkel called for Athens to set up a separate account to ensure that billions of euros in bailout money go directly to servicing debt, and not other government spending priorities.

The proposal would amount to a financial straitjacket that would force Athens to put a higher priority on repaying its foreign lenders than on financing government services.

"I also support the idea that the necessary interest payment for the debt service is put on an extra account to make sure that Greece will steadliy make this money available," Merkel said.

Merkel and Sarkozy, a lockstep pair some pundits have referred to as "Merkozy," spoke during the 14th French-German Council of Ministers that focused on coordinating the countries' tax policies and Europe's debt crisis.

Most attention Monday centered on Athens, where Greek Prime Minister Lucas Papademos is due to meet with negotiators from the eurozone and the International Monetary Fund then with the leaders of the three parties backing his coalition.

The talks follow an intense weekend of negotiations that failed to produce a breakthrough on the second international bailout and on a second deal, a writedown by banks and other private investors in their share of the country's crippling debt load.

A Sarkozy aide, speaking on condition of anonymity because of presidential palace rules, said the plan to earmark some of Athens' funds would help ensure that Greece, once its debt is fully restructured, would be able to service its debt.

Details of the proposal still need to be worked out, the aide said. One option would be for Greece to write into law a higher priority on servicing debt. Another could involve blocking funds from the International Monetary Fund or European lenders in an account to ensure a focus on debt service.

Meanwhile, a person familiar with the negotiations for the second Greek bailout said the separate account for interest payments could be one way of getting the European Central Bank to help in saving Athens from bankruptcy.

The ECB is estimated to hold between euro50 billion ($66 billion) and euro55 billion ($72 billion) in Greek government bonds, but it is not participating in a separate debt swap with private bondholders.

The ECB could pay any profits it makes from its Greek bonds, which it bought at a discount in the early days of the debt crisis, into the separate account, thereby indirectly helping the country with its interest payments, the person said.

He was speaking on condition of anonymity because the ECB is independent and the eurozone wants to avoid any sign of political pressure put on the bank.

The new account idea could amount to an alternative to Germany's controversial proposal last week for Greece to temporarily cede sovereignty over tax and spending decisions to a eurozone budget commissioner before it can secure further bailouts.

Athens and the EU's executive commission rejected that idea.

On Monday, Merkel insisted Greece must meet the demands of the so-called Troika — the ECB, the International Monetary Fund and the European Commission — overseeing bailout efforts across Europe.

"I want to reaffirm, there can be no agreement if the Troika proposals are not implemented," she said.

Added Sarkozy: "The situation of Greece must be resolved once and for all."

The two leaders have sought to play up the importance of a solid French-German foundation to strengthen the embattled eurozone, and they clearly sought to convey a united front — often using similar language.

The German leader's party has said she will campaign with fellow conservative Sarkozy before France's presidential election this spring. Polls show he trails Socialist candidate Francois Hollande.

Sarkozy said France and Germany were also working to harmonize corporate taxes — in part with French officials looking to contour their tax policy to a German model with broader taxation, but at lower rates.

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Juergen Baetz in Berlin and Gabriele Steinhauser in Brussels contributed to this report.

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