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UPDATE 1-France, Germany in deal on euro zone crisis-sources

Published 11/28/2010, 09:17 AM
Updated 11/28/2010, 09:20 AM

* France-German deal on euro zone crisis resolution-sources

* Mains details to be announced later on Sunday

* EU finance officials holds talks in Brussels

BRUSSELS, Nov 28 (Reuters) - Germany and France have reached an agreement on how a future permanent mechanism for resolving debt crises in the euro zone should work once it is introduced in 2013, euro zone sources said on Sunday.

The main points of the deal were expected to be announced later on Sunday after a meeting of European Union finance ministers on approving a financial rescue for Ireland to prevent market contagion spreading to Portugal and Spain.

Some of the ministers signalled they would also discuss broader issues to stabilise the single currency, an apparent reference to the permanent rescue mechanism to replace a temporary structure that was created in May.

"France and Germany have pushed in the last hours for the Ecofin (finance ministers) to send a clear message on the participation of the private sector in the permanent mechanism. A deal has been reached," said an EU source familiar with the talks.

Economists have said that to stop the euro zone's sovereign debt crisis from spreading from Ireland, the 16 countries that use the currency need to spell out the details of the permanent mechanism for debt crisis resolution.

Germany and France say the European Financial Stability Facility, created to support euro zone countries with sovereign debt problems after Greece sank into crisis, must be replaced by a permanent structure in 2013.

Germany and France say the permanent system should involve private bondholders -- banks, pension funds and other investment vehicles -- incurring losses if a country defaults or has to restructure its debts.

There is concern in financial markets over how big a writedown bondholders could suffer.

The EU sources said European Economic and Monetary Affairs Commissioner Olli Rehn, EU President Herman Van Rompuy and Eurogroup chairman Jean-Claude Juncker discussed the issue in talks on Sunday before the finance ministers' meeting.

"They gave the go-ahead to the main line of this permanent mechanism. It would be 90 percent inspired by the EFSF, with a strong legal basis to please Germany, a clear role for the IMF and a participation of the private sector", one source said.

A second source said the participation of the private sector "should be on a case-by-case basis".

"It is unlikely that this proposal will be made public tonight ... but its main lines will be made public as well as the question of the private sector's participation," one of the sources said.

(Reporting by Julien Toyer, writing by Jan Strupczewski, editing by Timothy Heritage)

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