European leaders tackle debt at crisis summit
European leaders meet Sunday for a crunch summit aimed at tackling the eurozone's spiralling debt crisis after warning lenders a day earlier to accept 50% losses on Greek debt and agreeing to a bank recapitalisation plan worth more than $100 billion.
AFP - Europe aimed to nail down a solution to the worst economic crisis in its history Sunday, as the spotlight at an emergency meeting of EU leaders fell on Italy amid contagion fears in the eurozone.
Ahead of the crunch summit, keenly watched around the world as concerns grew that the eurozone debt crisis could spark a global recession, European leaders appeared to be ironing out their differences and inching towards a deal.
The two key players, Germany Chancellor Angela Merkel and French President Nicolas Sarkozy, hailed "progress" in fighting the crisis as finance ministers thrashed out a framework to protect banks after a marathon session of talks.
After agreeing that lenders would have to accept losses of at least 50 percent on their Greek debt holdings, ministers clinched a deal on boosting bank reserves to allow them to plug the resulting hole, worth 150 billion dollars.
Under the bank recapitalisation plan, "107-108 billion euros" would be pumped in to bring lenders' core cash reserves up to a newly raised nine percent of holdings, a diplomat told AFP.
Officials said Spain, Italy and Portugal, where banks are seen as being on shaky ground, raised objections to the proposal and had to be convinced by officials of the European Banking Authority and the European Central Bank.
Moreover, the lenders themselves have yet to sign off on the "voluntary agreement," with Belgian Finance Minister Didier Reynders telling reporters after 13 hours of talks: "We need to negotiate with the bank sector."
Polish Finance Minister Jacek Rostowski said the bank plan would only work as "part of a comprehensive package" and while some pieces of the complex crisis jigsaw have been slotted into place, stubborn differences remained as leaders gathered.
The major stumbling block is how to scale up the EU's 440-billion-euro warchest that leaders want available in the event that a big economy such as Italy or Spain is dragged into the debt mire.
The bailout fund would be rapidly depleted if either of that pair needed help, so leaders are looking at ways to boost its effective lending capacity without actually putting more cash in, unacceptable in EU paymaster Germany.
France backed away from a proposal to turn the fund into a bank that could borrow almost unlimited amounts from the European Central Bank under pressure from Berlin and the ECB itself and two options were left under discussion.
One sees the fund used to provide insurance to investors that their losses would be covered in the event of a default. In this way, the package could exceed one trillion euros, which leaders hope would restore market confidence.
The other option would be to create a separate fund and entice international investors and institutions to match EU commitments, thereby increasing the amount of cash available for potential future bailouts.
Rostowski, whose country currently holds the EU's rotating presidency, called for the creation of "a large and credible firewall in terms of preventing contagion spreading from one sovereign to another."
However, agreement on this issue seemed to be far away, with Dutch Finance Minister Jan Kees De Jager saying that "big differences" still had to be ironed out.
The main reason for boosting the fund is to protect countries like Italy, whose prime minister Silvio Berlusconi came under pressure to do more to reduce his nation's enormous debt mountain to avoid a fate like Greece's.
Berlusconi was called in on the eve of the summit for face-to-face talks with Merkel who wants Italy to slash its staggering 1.9-trillion-euro debt, which amounts to 120 percent of gross domestic product.
He was also to meet EU President Herman Van Rompuy before the summit started, with a diplomat from one of the European countries attending saying: "The idea is to put pressure on Berlusconi."
The European Commission has also turned up the heat on Rome, calling on the government to unveil a raft of budgetary cuts "as a matter of urgency."
With several complex sticking points left, hopes that a comprehensive solution would be found at this summit were likely to be dashed, with Merkel saying: "There will be no definitive decisions before Wednesday."
Negotiations "will be difficult", she added, as leaders braced for yet another drawn-out round of talks they hope will lay the ground for a final solution on Wednesday.
European leaders hope to have a "comprehensive plan" to present to their counterparts from the group of 20 leading industrial powers at a meeting in Cannes on November 3-4.