Merkel sees dangers in forgiving Greek debt

Reducing the amount of debt to be repaid would endanger banks and other creditors who hold Greek bonds, along with institutions that sold insurance against a default, Merkel said.

Those credit default swaps have a significantly higher face value than the debt itself, and the consequences of their being called can’t be foreseen, she said.

“Nobody around the globe knows exactly who holds those papers and what it means if they come due,’’ Merkel told Parliament’s European affairs committee. She said it was unclear “who will have to pay how much and who will need fresh capital.’’

A debt restructuring also could prove contagious, leading investors to question the stability of other European nations.

The chancellor wants private creditors to voluntarily contribute to the next aid package for Greece, an initiative for which Merkel does not yet have a majority among leaders of the 27 EU nations holding a summit in Brussels this week.

It remains unclear how much money might be contributed by private creditors, but Merkel said it must be substantial.

The EU summit comes after Greek Prime Minister George Papandreou survived a vote of no-confidence early yesterday, paving the way for an even tougher vote next week on the adoption of a new austerity measures.