Financial executives attending the Davos forum voiced cautious optimism that the euro zone's debt crisis would be resolved without contagion spreading to Spain or investors being forced to take unbearable losses.
Policymakers from the United States, the European Union and the financial sector were due to focus on Europe's debt woes at a series of private meetings and discussion panels at the annual World Economic Forum on Thursday.
But a year after the Greek fiscal crisis dominated Davos, leading to bailouts for Greece in May and Ireland in December, business leaders say expectations are growing that the EU is readying effective action to help weaker members of the single currency area and restore confidence in the financial sector.
"I think Europe did the only good choice, which is to get through this crisis, because if you don't fix it here, you're going to fix it there, which is in the banking system," JP Morgan Chase Chief Executive Jamie Dimon said.
He said it would be far too risky for any country in the euro zone to restructure its debt, citing the weakness of the financial sector and the risk of triggering unpredictable capital flight and a banking crisis.
European insurance executives said private bondholders might be asked to take some write-down, known as a haircut, on some southern euro zone countries' debt in the next few years but it would not cause severe problems for their business.
"We're positive the euro will continue to exist as a currency and the euro zone countries will work out their problems overall," Dieter Wemmer, chief financial officer of insurer Zurich Financial told Reuters.
"I think that there's the likelihood that in some areas some haircut will occur. Whether it will be dramatic — I don't think so," Wemmer said in an interview.
EU leaders are expected to adopt a comprehensive package of measures at a summit in late March involving reforms to its rescue fund, tougher fiscal discipline rules and commitments to structural economic reforms to improve competitiveness.
In an interview with Reuters Insider television on Wednesday, European Central Bank Jean-Claude Trichet called for a strengthening of the 440 billion euro ($603 billion) European Financial Stability Facility "both in quantity and in quality". The fund should be made as flexible as possible and allowed to buy troubled countries' bonds, he said.
The ECB has bought 76.5 billion euros in Greek, Irish and Portuguese bonds since May to stabilise the euro zone bond market, as well as providing cheap liquidity to those countries' banks. But it is looking to exit those emergency policies.
UNSUSTAINABLE?
Many economists and market analysts say Greece's debt burden is unsustainable and will have to be restructured or rescheduled sooner or later. Athens hotly denies any such intention but is pressing for more time to repay its 110 billion euro EU/IMF rescue package and a lower interest rate.
Underlining the global struggle with debt, ratings agency Standard & Poor's cut Japan's long-term sovereign credit ratings to 'AA-' from 'AA' on Thursday, saying it expects the country's fiscal deficits to remain high in the next few years.
Domenico Siniscalco, CEO of Morgan Stanley Europe and a former Italian finance minister, told Reuters Insider television that policymakers and bankers were working hard to find a solution to the euro zone "and I believe we are going to make it".
He said the euro zone rescue fund established to help states in difficult was "the embryo of a European treasury" and the huge demand on Monday for its first issue of bail-out bonds for lending on to Ireland showed it had market confidence.
Dimon said Germany was right to oppose any mutualisation of euro zone countries' debt, but the chief executive of German retailer Metro, Eckhard Cordes, said that even though the idea of common euro zone bonds was not popular in Germany, it was the only alternative to "some countries going belly-up".
Martin Sorrell, CEO of WPP, the world's biggest advertising company, said he was struck by the increased faith among economists and executives in the euro zone's ability to overcome its problems.
"One thing about Davos is there seems to be a bit of restrained optimism," he told Reuters Insider, noting that even sceptics such as U.S. economist Nouriel Roubini — nicknamed Dr. Doom for predicting the credit crisis — were more upbeat on the euro zone.
A senior European insurance executive said troubled countries such as Greece and Ireland had several options to reduce their debt burden without forcing private creditors to take a haircut.
They could, for example, buy back their own bonds on the secondary market at a discount or stretch out debt repayments.
"At some point in time you can prolong existing debt. You simply say 'I am going to continue to pay interest but will not repay the principal until three years later than I had originally agreed'," the executive said.
Such solutions were far more likely than a restructuring involving write-downs for creditors, which is common in the United States under the Chapter XI bankruptcy law, but carries a permanent stigma in Europe.
Greece's public debt reached 145 percent of gross domestic product last year and is expected to peak at 158 percent in 2013.
An economic adviser to the German government and a member of the European Parliament called on Wednesday for moves to reduce Athens' debt burden, in signs that the idea is gaining ground despite the denials of euro zone policymakers.
