Eurozone to guarantee Greek bonds in a default: diplomats

(BRUSSELS) - The eurozone will use its crisis fund to guarantee Greek bonds during any partial debt default to enable the European Central Bank to continue financing private banks, diplomats said Thursday.

Eurozone leaders were set to adopt at a summit a new Greek rescue package that will include the participation of the private sector, which is expected to be interpreted by credit ratings agencies as a partial or selective default.

A European diplomat said such a Greek default would last "a few days," if the actions taken by private creditors reduce the Greek debt quick enough for ratings agencies to then withdraw the default status.

During that time, the ECB would in theory have to refuse Greek sovereign bonds as collateral for loans to Greek private banks.

Greek banks, which now depend on credit from the ECB, could face bankruptcy if the Frankfurt-based central bank stopped funding them.

To ensure this does not happen, the eurozone's crisis fund, the European Financial Stability Facility (EFSF), will guarantee Greek bonds and in return the ECB will continue accepting them as collateral, diplomats said.

One diplomat said the guarantees could amount to 20 billion euros ($29 billion) during a short-lived default.