Euro zone summit on Greece called for July 21

By Luke Baker

BRUSSELS (Reuters) - Euro zone leaders will meet in Brussels on July 21 to discuss a second bailout package for Greece and the financial stability of the euro area, European Council President Herman Van Rompuy said on Friday.

The summit, which will start at 1000 GMT, could prove a critical moment in determining what role private sector creditors play in further aid to Greece, and how EU leaders will stem the threat of debt contagion to Italy and Spain.

"Our agenda will be the financial stability of the euro area as a whole and the future financing of the Greek program," Van Rompuy said in a statement posted on Twitter.

With the region's debt problems now threatening Italy, the euro zone's third largest economy, there is a pressing need for leaders to come up with a bolder and more comprehensive solution to a crisis that has dragged on for more than 18 months.

The first priority is for the euro zone to agree on the terms of a second bailout package for Greece, which needs about 110 billion euros of extra funds to keep it financed until the end of 2014, when it is supposed to return to financial markets.

Germany wants Greece's private creditors -- banks, insurance funds and other investors -- to shoulder some of the burden of the second package, preferably as much as 30 billion euros. However, talks with the private sector over the past three weeks have failed to reach a deal on how they will be involved.

It also remains unclear how Greece's debt burden, estimated at around 160 percent of GDP, can be cut significantly enough to bring its debts back to a sustainable level, which most economists regard as around 60 or 80 percent of GDP.

Greece's total outstanding debt is around 370 billion euro.

One proposal is for a buy-back of Greek bonds, with the European Financial Stability Facility, the 440 billion euro rescue fund set up in May last year, lending money to Greece so it can buy back bonds at closer to current, depressed prices.

There is also a proposal for a bond swap in which the private sector would trade their existing holdings of Greek bonds for longer-dated securities, which would have the effect of giving Athens more time to pay back its debts.

Financial markets have grown skeptical about the ability of euro zone leaders to take the necessary, difficult decisions to get on top of a crisis that threatens to pull apart the 11-year-old single currency project.

Thursday's meeting could prove a definitive moment in deciding if the euro zone has what it takes to retake the initiative, or, if there is insufficient resolve among leaders, it could produce renewed turmoil in financial markets.

(Editing by Ron Askew)