Sarkozy, Merkel back special Greek debt account

REUTERS - France and Germany called on Monday for Greece to hand over into a protected account the interest it pays on its debt to ensure it meets commitments to creditors.

Days after German proposals for external surveillance of Greece's budget caused outrage in Athens, French President Nicolas Sarkozy and German Chancellor Angela Merkel urged the creation of the escrow account, which would wrest control of some bailout funds from Greece's hands.

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"I support, as the French president has, the idea that the necessary interest payments for the debt be paid into a separate account to make sure that Greece then consistently makes this money available," Merkel told a joint news conference in the Elysee presidential palace.

No Greek official was immediately available for comment on the proposal.

One French source said the idea, floated by Germany, was for funds from a planned second 130 billion euro bailout programme for Greece to be siphoned off to reassure bondholders that future payments were guaranteed. The scheme, which was only at a preliminary stage, was to demonstrate that debt payments were being given priority in Greece's budget, the French source said.

Greece, which has repeatedly failed to meet fiscal targets set out by its international lenders, had reacted angrily to German calls for the appointment of a "budget commissioner", saying it would be undermine national sovereignty.

With negotiations dragging on between Greek political parties over terms for the second bailout package, Sarkozy and Merkel warned time was running out. If no deal is reached, Athens would not receive the fresh funds from its 'troika' of international lenders - the European Commission, European Central Bank and International Monetary Fund - to meet debt payments in March, the two leaders warned.

"Greece's leaders have made commitments and they must respect them scrupulously ... Europe is a place where everyone has their rights and duties. Time is running out, it needs to be concluded, it needs to be signed," Sarkozy said. The office of Prime Minister Lucas Papademos, a former central banker who heads a government of politicians, said that a meeting of leaders from the conservative, socialist and far-right parties due on Monday had been postponed to Tuesday.

"We want Greece to stay in the euro. To say it clearly, this is the opinion of both of us," Merkel said. "But I also say -- there can be no new Greece programme if agreement is not reached with the Troika."

The French and German leaders also discussed measures to improve harmonisation of corporate tax rates and bases, ahead of presenting these proposals to their euro zone partners as part of a programme to improve fiscal convergence in the bloc.

A Franco-German draft on tax harmonisation -- published after the meeting and intended to stimulate debate on the subject within the European Union -- was aimed at making it easier for small- and mid-sized companies to do business across national borders.