Angela Merkel dashes hopes of lasting settlement on Eurozone debt.......

Banks could be slapped with a levy of €10bn (£8.8bn) over three years to raise €30bn for another Greece bailout.

Angela Merkel has quashed hopes of a lasting solution for Greece at Thursday's crucial summit of European leaders, even as the International Monetary Fund warned of the repercussions for global economic growth if the eurozone's debt crisis was not tackled quickly.

Amid suggestions that banks could be slapped with a levy of €10bn (£8.8bn) over three years to raise €30bn for another Greece bailout, the German chancellor insisted that there would not be a "spectacular event", such as a restructuring of Greece's debt. "Further steps will be necessary and not just one spectacular event which solves everything," Merkel said.

Economists warned that indecision after tomorrow's summit could cause severe tension in the markets.

Gabriel Stein, at Lombard Street Research, said: "Ministers must come up with some solution that does not involve postponing once again the difficult positions that alone can solve the fiscal crisis. Otherwise the next eruption of the crisis won't be in the autumn, it is more likely to be next week. Moreover, each failure to act raises the threshold for what must be done next time."

Jonathan Loynes, chief European economist at Capital Economics, described Thursday's meeting as the "last chance for eurozone policymakers to get a grip on the region's debt crisis".

"Anything other than a very decisive response, which could be applied not just to Greece but also to Spain and Italy, could see the situation become irretrievable," said Loynes.

In an assessment of eurozone policies, the IMF also piled on the pressure on European leaders to act to solve the crisis and pump more money into its banks.

"It would be very costly not just for the eurozone but for the global economy to delay tackling the sovereign crisis," the IMF's Luc Everaert said.

The fund argued that the European Financial Stability Facility, set up last year to bail out troubled eurozone countries, should be increased and buy up bonds in an attempt to restore confidence in the financial markets.

But for now some European Union leaders remain in disagreement with the European Central Bank, which has been arguing that a default by Greece would mean it could no longer provide funds to domestic banks. Leaders such as Merkel believe that the private sector needs to take losses on its holdings of bonds to help shoulder the burden of rescuing Greece.

However, there was confusion in the markets on Tuesday when Ewald Nowotny, head of Austria's central bank, appeared to suggest that Greece could default on its debt without causing a crisis for its banking sector. But he later issued a statement insisting that he shared the view of the ECB that a default was unpalatable. The ECB helps to fund the European banking sector in return for sovereign bonds, but will not do so if the country has defaulted on its debt.

The confusion about the stance of the ECB towards Greece pushed yields on two-year Greece bonds through 40% as speculation mounted that a default was more likely.

With the FTSE 100 rising 37 points to 5,789, stocks recovered some of the losses after Monday's rout in financial stocks – when three top UK banks lost £5bn of their value – while yields on Italian and Spanish bonds slipped back from their record levels. Even so, Spain was forced to pay 3.912% on an 18-month bond, the highest price since 2002 and considerably more than the 3.26% since the last sale of similar bonds.

http://www.guardian.co.uk/business/2011/jul/19/european-debt-crisis-greece-summit