A TAX on euro zone banks and cheaper, longer-dated official loans are the least risky way to provide extra funding for debt-stricken Greece, according to a confidential paper drafted ahead of tomorrow’s European summit.

The options paper dated July 16th – but which officials said still reflected the wide open state of the debate – showed a tax on the financial sector was the only proposal deemed unlikely to cause a selective default.

It identified three main options: the levy could be combined with a commitment by Greek banks to roll over their big holdings of government debt, an extension of the maturity, and a further reduction of the interest rate on euro zone loans to Athens.

The document gave no figure, but officials have said they are considering extending the loans to 30 years and cutting the interest rate to 3.5 per cent from the original 5.5 per cent, which was reduced to 4.5 per cent in March.

The euro zone paper said other options such as an European Union-funded Greek government buy-back of its own debt on the secondary market, a German-proposed bond swap for longer maturities and a French plan for a voluntary rollover of maturing Greek debt would all generate additional costs for official lenders.

In those scenarios, euro zone governments would have to provide billions of euro to recapitalise Greek banks and provide them with collateral to obtain European Central Bank funding, it showed.

A buy-back of Greek debt would do most to reduce that country’s debt mountain – close to 160 per cent of annual economic output – and make it more sustainable.

But it would also be the most costly option for the public purse, requiring billions of euro in additional euro zone loans on top of support for Greek banks and ECB collateral, the paper showed.

Another EU source said the outcome on Thursday was likely to be a mix of several options, with a bank tax, some form of debt swap and substantial extra loans to Greece from the euro zone’s European Financial Stability Facility rescue fund. – (Reuters)