Eurozone faces crunch week in debt crisis

Eurozone countries must settle their debt crisis at an emergency summit this week to stop Greece toppling into default and dragging bigger euro economies into deeper trouble. After finance ministers failed to clinch a new rescue package for Greece on July 11, stocks and the euro tumbled amid warnings that a Greek debt default could infect the third and fourth biggest eurozone economies, Italy and Spain. Some observers warned the crisis could drive Greece to abandon the euro and could even break up the eurozone altogether. \"The policymakers\' continued dithering appears to be pulling both Spain and Italy further into the crisis,\" wrote analysts at financial consultancy Capital Economics. \"Either they stop fiddling and take decisive action or they may soon have to start contemplating the unthinkable.\" The 17 Eurozone countries want to impose a tax on banks to involve the private sector in paying for the rescue of indebted Greece, according to German daily Die Welt. The tax would target even banks \"not directly involved in Greece\", the newspaper wrote Monday, citing highly-placed diplomatic sources involved in the talks. The plan also envisages that the private banking sector will \"contribute to the repurchase of Greek bonds,\" it wrote, without giving further details. EU president Herman Van Rompuy said the summit in Brussels on July 21 would focus on both the financial stability of the eurozone and future financing of the Greek programme. German Chancellor Angela Merkel described the meeting as \"urgently necessary,\" in comments to ARD broadcaster Sunday. \"We have to issue a sign of stability, and I think we can move forward on a new Greek programme ... we have to deal with Greece,\" she added. She said of the gathering however: \"I am only going if there\'s an outcome.\" Greek Prime Minister George Papandreou said it was time for Europe to \"wake up\" and find a conclusive solution to his country\'s debt crisis. The EU and International Monetary Fund bailed out Greece in May 2010 with a package worth 110 billion euros ($160 billion) in exchange for a series of unpopular austerity measures to stabilise its public finances. The country is still in serious difficulty and needs another bailout valued at around the same amount. Its debt has exploded and market hostility has kept it from raising fresh loans. Ireland and Portugal have also had to be bailed out, while Italy and Spain are seen to be at risk due to their strained public finances. Italy\'s parliament on Friday passed a 48-billion-euro austerity budget aimed at slashing the public deficit by 2014. As eurozone leaders consider ways to buy up Greek debt to take the short-term pressure off, a key sticking point is what the role of private lenders in this restructuring might be. Germany is pushing for Greek banks to help shoulder the burden of a second bailout scheme but critics warn that markets could interpret this as an effective default, with banks forced to let Greece off, and panic would escalate. European Central Bank President Jean-Claude Trichet said in an online interview with Financial Times Deutschland (FTD) that eurozone governments will be \"responsible\" for Greek debt if there is a default. \"I have warned heads of state and government several times that in the case of a country defaulting on payments, it will no longer be possible to accept their bonds as regular guarantees. \"In these conditions, the governments (responsible for the situation) will have to fix the situation themselves. It will be their responsibility.\" Merkel told ARD: \"We are trying to do all we can to avoid something even more difficult (than involving private creditors). \"But I say clearly, the involvement of private creditors already shows that we have a particular problem with Greece due to its very, very significant debt.\" 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. Some have suggested the eurozone issue \"eurobonds\" to raise money for Greece at lower borrowing rates. The head of Germany\'s central bank Jens Weidmann slammed this as unfair to European taxpayers, in comments published Sunday. Market tension was heightened last week by the release of the results of \"stress tests\" which diagnosed eight European banks as unstable, after the close of markets on Friday. Meanwhile markets are anxiously watching a row in Washington between US President Barack Obama and his Republican opponents in Congress who reject his plans to raise the country\'s debt limit to allow more US borrowing. The government has warned that failure to reach a deal could tip the world\'s richest economy into a debt default.