BRUSSELS (MNI) – European leaders defended their management of the
Eurozone debt crisis on Sunday but did not conclude a decisive rescue
package to end nearly two years of market turmoil.

Leaders claimed progress on a three-pronged strategy that included
the outline for a recapitalization of European banks, two options for
leveraging Europe’s E440 billion rescue fund, and the start of
negotiations to reduce the amount of Greek debt held by the private
sector by as much as 60%.

French President Nicolas Sarkozy told a packed press conference on
Sunday night that France and Germany were “singing from the same hymn
sheet” on the rescue plan, but as the meeting broke up there appeared to
be signs of serious discord within the Eurozone.

Sarkozy himself was forced to back down from his cherished goal of
making the bailout fund a bank so it could access funds from European
Central Bank. As the summit broke up on Sunday, all parties agreed that
option was off the table.

Leaders also revealed that Italy had come under serious pressure at
the summit, with France and Germany demanding reassurances from Italian
Prime Minister Silvio Berlusconi that his promised economic reforms
would be implemented quickly.

German Chancellor Angela Merkel said that faith in Italy’s ability
to resist contagion from Greece “cannot be based solely on a firewall.”

And while Eurozone finance ministers approved a sixth tranche of
official aid to Greece, sources revealed that Germany, Finland and the
Netherlands had wanted to delay the payment. The measure had to be
pushed through by Eurogroup President Jean-Claude Juncker, sources said.

When leaders from the 17-member Eurozone and the 27-member European
Union reconvene again in Brussels on Wednesday, they will also have
plenty of work to turn the beginnings of a plan into a real one.

They have to decide between two completing plans to leverage the
European Financial Stability Facility. One plan calls for creating a
special-purpose vehicle with seed money from the EFSF that would buy
government debt of countries perceived to be at risk. The other is a
plan to use EFSF funds to insure bonds issued by troubled countries.

Negotiations with private-sector banks to write down the value of
their Greek debt by 50% or more have so far had only “limited” success,
Charles Dallara, managing director of the Institute of International
Finance, a lobby group for the world’s largest banks, said on Sunday.
Banks are said to be have proposed a 41% haircut on Greek debt but are
fiercly resisting the 60% writedown demanded by Germany.

One senior EU official told Market News International that bankers
appeared ready to compromise on a haircut figure of 50% after Eurozone
leaders pressured them on the issue with a “take it or leave it”
message. Even with a haircut of 50%, up from the 21% envisioned in July,
a second public sector bailout package for Greece will still need to be
boosted to E138 billion from the previous E109 billion, the official
said.

The easiest part of the package, the bank recapitalization, also
has major question marks. Raising Tier 1 capital to 9% of risk-weighed
assets by mid-2012 would require European banks to raise more than E100
billion in capital, or to shrink their balance sheets by a similar
amount.

Merkel said that banks would only have access to EFSF funds after
their own options, and the options of their national authorities, were
exhausted. “There will be strict terms for banks wanting to get capital
from the EFSF,” one EU source said.

Standing next to Sarkozy at a joint press conference, Merkel said
there was “broad agreement” on the outlines of a plan, but that more
technical work needed to be done before the details could be approved.
“This has to be done carefully and accurately,” she said.

Sarkozy said the deliberate pace of the negotiations was due to the
“mindboggling complexity” of the package. And he snapped at a reporter
who suggested that this plan, like other Eurozone rescue plans before
it, would ultimately be judged disappointing by the markets.

“France and Germany have always shouldered their responsibilities,”
he said. “You might try asking me where we would be today if we had
not.”

— By Angelika Papamiltiadou, Peter Koh and Jack Duffy
— Paris newsroom, +331-42-71-55-40; jduffy@marketnews.com

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