Brussels - Europe will find a cure for its debt crisis between now
and Wednesday, the leaders of Germany and France vowed after fixing
plans to recapitalise banks out of pocket over Greece.
Chancellor Angela Merkel and President Nicolas Sarkozy
both cited "progress" before knuckling down to the biggest sticking
point on the eve of an EU summit where Italy comes under intense
pressure to lift much of the burden.
Negotiations in Brussels "will be difficult," Merkel
said of a Sunday target to shape "definitive decisions" come a second
summit called for midweek.
"This is why it is important for France and Germany to
be active," she added, as officials in Brussels and national capitals
worked tireless to seal a deal.
Since early Friday, senior ministers from around the
European Union have worked to break down the barriers to a solution that
markets can buy: it was almost midnight (2200 GMT) on Saturday when
Europe's power couple ended a flurry of preparatory talks.
Nothing immediately filtered out from the talks also
involving International Monetary Fund managing director Christine
Lagarde, EU president Herman Van Rompuy and EU executive chief Jose
"These meetings are absolutely crucial," Sarkozy said
of carefully choreographed moves to chop Greece's debts in half or more,
plug consequent holes in bank balance sheets and ramp up broader
eurozone rescue funding firepower.
"We must resolve this financial crisis," he added, saying there was "no other choice" but to agree an "ambitious solution."
Greece will get a new bailout once negotiations
conclude with banks told to face facts and write off "at least 50
percent" of their bond holdings, diplomats say.
In exchange for "voluntary" agreement -- so as not to
trigger default insurance contracts -- Greece would get new rescue loans
from eurozone and EU partners, plus the IMF.
That followed a decision on Friday to release 8.0 billion euros ($11 billion) in blocked loans next month.
The cost to European governments of the second rescue
package will be a bit higher than originally thought, with Athens
enduring a brutal recession.
Banks meanwhile can also now count on governments to
fill a $150-billion hole in their reserves, with "107-108 billion euros"
required to bring lenders up to newly raised standards, officials also
Italy, Spain and Portugal each had to be separately
convinced by officials of the European Banking Authority and the
European Central Bank (ECB), another diplomat said.
Many Italian and Spanish banks, like the French, have
seen their credit rating downgraded in recent weeks as fears rise over
their exposure to sovereign debt.
Belgium's Finance Minister Didier Reynders said the nitty-gritty of negotiations with the banks had still to conclude.
Nevertheless, these two pieces of the political puzzle
fell into place amid dire warnings that Europe's difficulties in
overcoming the crisis would provoke a global recession.
The biggest challenge, somehow giving the
440-billion-euro European Financial Stability Facility (EFSF) a reach
several times greater, remains at the core of Sunday's talks, alongside
demands for Italy to cut its coat according to its cloth like never
Greek Prime Minister George Papandreou said differences
here had to be resolved in the coming days "not only for the future of
Europe but for the existence of Europe."
A damaging row pitting Paris against Berlin slipped
from view slightly when French proposals for the EFSF to tap into
unlimited ECB funds were dropped, Dutch Finance Minister Jan Kees De
Poland's finance minister Jacek Rostowski said one way
or another Europe would need to agree on "the creation of a large and
credible firewall in terms of preventing contagion spreading from one
sovereign to another."
Diplomats said two complementary scenarios are under
examination: using the EFSF to insure partial losses on future eurozone
bonds, and proposals to create a special 'fund within a fund' that would
entice emerging economies to support stressed eurozone economies.
The idea is that if Europe must bring costly solutions
to a G20 summit at the start of November to save the world economy,
emerging nations should also do their bit.
As a key member of the inner G7 alongside the United
States and Japan, British finance minister George Osborne said London
would be "keeping up the pressure over the next couple of days" to craft
a lasting, overall solution to the crisis.
Italian Prime Minister Silvio Berlusconi held
face-to-face talks with Merkel overnight and is to have another
head-to-head with Sarkozy on an unrelated row over personnel changes at
Spain too is under close watch by partners, but the
European Commission says Italy must present a new national financial
plan "as a matter of urgency."
Germany particularly wants Italy to slash its 1.9-trillion-euro debts.
A participant in the evening talks among conservative
rivals, who had to remain anonymous, said Berlusconi was "very
reluctant" to discuss with Merkel the need to implement extra measures.