Brussels/BERLIN (Reuters)-the Euro zone plans for the Summit in a leader on a second Greek rescue was thrown into doubt as Germany on Wednesday, raising fears the markets can make use of the political vacuum with a new attack on the block high debtors.
Berlin held fast to its policy that Greece was funded until September so there was no rush to finalise the details of a second package. "There are no concrete plans for a special summit," said a German Government spokeswoman.
Others were less sanguine. Italian central bank chief Mario Draghi, soon to take the lead of the European central bank, and Ireland's premier both said a final plan was needed and quickly--echoing a strongly worded attack from Greek Prime minister earlier this week.
Ratings agency Moody's downgraded Ireland's credit to junk status on Tuesday, and said that Greece, would need a second operation. Minds have focused even more sharply by a market attack against Italy which, if required, would strain the eurozone's existing rescue funds.
"Moody's problem lies not in Ireland, Ireland's problem is with Europe," Prime Minister Enda Kenny told Parliament. "There is no point in a meeting which will not provide a conclusion of a comprehensive meaning to something that will not disappear unless it is dealt with."
The European Commission, sharply critical of the role of credit rating agencies play, described Moody's decision as "incomprehensible." That the costs of insurance Irish debt against standard steps and 10-year bond yields hit 14.19%.
Italian and Spanish bond settled but traders expected no long-term respite without decisive action.
"We are still quite bearish on the periphery, in General, given there are different risk factors for policymakers response to the crisis so far," said Michael Leister, a strategist at WestLB. "We are sure not even if they can turn things in the short term."
QUARREL
Leaders must draw down how private holders of Greek Government bonds can be persuaded to defray part of the cost of a new package for Greece and weigh up the potential impact on markets about to secure their participation be declared a debt default by rating agencies, as expected.
But they appeared to be subsiding in a wave of internal quarrels and the risk that creates a hopeless situation:
If someone now Summit on Friday, may have a strong negative impact on the financial markets. If the room and no clear decision, the effects can be worse.
Herman Van Rompuy, President of the European Council, has announced he intends to keep the Summit ambassadors on Friday evening, and most of the Member, 17 euro zone set back the decision, but Germany is reluctant to set a date, especially if there are any ready to take the decision.
"The markets reacted very badly after euro zone finance ministers were unable to reach an agreement," an EU diplomat said, referring to a Finance Ministers meeting on Monday. "If they cannot agree, we take the fight to the highest level. People are working on a number of conclusions to be agreed. "
A senior EU official said the Germans were furious that "backed into a corner" and therefore held fast to not participate on Friday, which was to skittle the Summit. Diplomats said furious rounds of phone calls were made.
They said current intention was for the leaders to meet on Friday night and for Finance Ministers to gather again on Sunday, so the precise details of a plan can be established before financial markets open on Monday.
STRESS TEST
A major problem on the leaders ' minds are the results of stress tests on 91 European banks, to be released on July 15, which is expected to show 10 or more banks may have failed.
That may have an additional impact on Italy, where the bank stocks and the bond market has been affected by growing concerns that the euro zone's third-largest economy may be next in line after Greece, Ireland and Portugal to suffer debt contagion.
Draghi said Italian banks would comfortably withstand stress tests but reiterated Kenny's call for a comprehensive EU response to spreading debt crisis.
"We must realise that the management of the financial crisis has not gone smoothly with partial and temporary interventions," he said in a speech to the Association of Italian banking sector.
"We must now bring security to the process by which sovereign debt crises are handled, by clearly defining policy objectives and for the design of instruments and the amount of resources," he said.
Current proposal on the table to protect private sector involvement in Greece focused on the repurchase of Greek Government bonds and replacement of existing Greek debt for longer dated securities with a lower coupon, thus considerably reducing The outstanding obligations.
However, it is unclear how a buy Greek bonds would be financed. A proposal is to use the 440 billion European financial stability Facility (EFSF), which has been used to bail out Ireland and Portugal.
The ECB is still strongly opposed to any Greek plan to credit rating agencies would likely see by default.
ECB policymaker Jens Weidmann, a former advisor to German Chancellor Angela Merkel, said EFSF should not be used to purchase bonds on the secondary market and it would be unacceptable for the ECB to accept defaulted Greek debt as collateral.
"Money (EFSF) bailout should not be used for purchases of government bonds on the secondary market," he told Die Zeit newspaper. "Containment of the crisis should not mean that we are undermining our principles. We must draw a red line. "
But Germany's Finance Ministry said funds from eurozone rescue mechanism would theoretically already be used by members of the block to buy back own bonds, suggesting a shift in Berlin's stance.
German newspapers ran headlines and articles on Wednesday called on leaders to take their forces.
"The fact that some important State still has not realised the problem the whole amplitude are ... disastrous," the commentator wrote in Die Welt.
A euro group official said Friday's meeting, if it happens, not to deliver on what the market expects.
"If there is a meeting on Friday, it is more psychological than anything else. The heads of State do not take anything, "he said, explaining that it was not enough time between now and then to prepare a meaningful decision.
(Additional reporting by Julien Toyer and Luke Baker in Brussels, and by Noah Barkin and Gernot Heller in Berlin; editing/writing of Mike Peacock)
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