Clouds loom over EU debt summit

26 October 2011 Last updated at 07:59 ET

Germany and France disagree on how to expand the EU bailout fund’s spending power

EU leaders are gathering for an emergency summit in Brussels aimed at tackling the eurozone debt crisis.

But with disagreement on how to expand the EU’s bailout fund for debt-ridden countries, there is growing doubt a comprehensive deal will be reached.

Urging legislators to support measures to boost the fund, German Chancellor Angela Merkel said Germany’s prosperity depended on a solution to the crisis.

There are fears that the Greek debt crisis could spread to Italy and Spain.

Ahead of the summit in Brussels, the German parliament will vote on whether to increase the bailout fund’s firepower without involving more German taxpayers’ money.

The measure is expected to pass but the key question is whether Mrs Merkel will need to rely on opposition support.

Speaking before the vote, she said it was worth taking the risk to maximise the bailout fund’s spending power in order to ensure future German prosperity.

She also said she would work towards reaching sustainable decisions at the EU summit in Brussels later on Wednesday, but nobody should expect quick solutions.

Mrs Merkel said she wanted to see Greece back on its feet but it would be necessary to stand by the country for “quite some time to come”.

As attention shifts to Italy and its huge public debt, Prime Minister Silvio Berlusconi has been asked to provide his EU colleagues in Brussels with details of its plans for economic reforms.

Sticking points

Among the main points of agreement reportedly reached at the weekend by EU officials are:

• European banks must raise more than 100bn euros (£87bn) in new capital to shield them against possible losses to indebted countries
• The European Financial Stability Facility (EFSF) – the single currency’s 440bn-euro bailout fund – will be given more firepower, although it is not clear how this will be achieved
• Lenders to Greece will be asked to agree to much deeper losses than the 21% write-off currently on the table.

According to the plan, the 100bn-euro bank recapitalisation would be provided to banks by commercial investors, national governments and the EFSF.

Key points of disagreement remain between the main eurozone powers.

France had hoped that the European Central Bank (ECB) would support the EFSF by providing it with loans that could increase the fund’s total capacity to 2tn-3tn euros.

But this idea was blocked by Chancellor Merkel.

Instead, governments are expected to agree that the EFSF can help out troubled eurozone governments such as Italy and Spain by providing partial guarantees to investors and banks who lend them more money.

BBC business editor Robert Peston says the EU is left with using complicated financial engineering that may only boost the EFSF capacity to about 1tn euros.

The markets may be disappointed in this, our business editor says, and it may only buy a year or so – not enough time for fundamental reform of Europe’s debt-ridden economies.

There was also disagreement over the extent of losses that should be imposed on Greece’s lenders, with Germany seeking a 50%-60% haircut.

The ECB is said to be against such an increase in potential losses.

And difficulty about such details appear to have been behind a decision to cancel a meeting of EU finance ministers which was to have preceded the leaders’ summit.

There are fears that a unilateral default by Greece – such as a debt write-off without lenders’ consent – could have unforeseen consequences.

French Prime Minister Francois Fillon said that if Wednesday’s summit ended in failure, “this could tip the European continent into unknown territory”.

Election speculation

Mr Berlusconi is expected to provide only promises of economic reforms in Italy, despite being demanded by other eurozone leaders to bring to Brussels concrete details of plans to reduce government debt.

In a long day of talks with his Northern League coalition partner, an agreement was reached on the contentious issue of raising the retirement age.

The Northern League denied Italian media reports that Mr Berlusconi had agreed with its leader Umberto Bossi that he would step down at the end of the year in order to hold early elections.

The BBC’s David Willey in Rome says there is little ground for optimism that the deal is going to satisfy either Italy’s EU partners or international financial markets about the country’s ability to repay its long-term debts.

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