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Eurozone leaders will attempt to reduce Greece's outstanding debt to 120 per cent of gross domestic product by the end of the decade, but were struggling on Wednesday night to pin down details of the private sector's contribution, needed for a comprehensive deal.
The sharp reduction in Greek debt levels, announced by Angela Merkel, German chancellor, would be likely to force bondholders to accept that their debt payments be cut in half, according to an analysis by authorities. International lenders believe Athens is on track for its debt to peak at 186 per cent of GDP in 2013, compared to 83 per cent for Germany.
But officials were making little progress with bondholders in talks that stretched into the evening, and it appeared likely that negotiations would continue beyond the much-anticipated summit of eurozone leaders. They were gathering in Brussels in an effort to finalise a three-pronged plan to tackle the European sovereign debt crisis.
The lack of an agreement with bondholders on the size of their Greek writedown was likely to make another major element of the European plan almost impossible to finalise: the size of new firepower for the eurozone's €440bn bail-out fund. That, in turn, complicates the final leg of the deal, recapitalising European banks, which need the beefed-up fund as a backstop.
Still, in addition to the 120 per cent Greek debt target, the general outlines of the deal were expected to be unveiled after hours of deliberations by Europe's presidents and prime ministers.
The bail-out fund, the European financial stability facility, would be given more wherewithal by guaranteeing bond losses rather than buying them outright - though without the Greek bail-out finalised, the amount left in the fund will remain unknown, meaning its ultimate firepower will not yet be calculable. Officials said they expect it to exceed €1,000bn.
In addition, European leaders are expected to set up a special fund seeded with money from the EFSF that they hope will attract outside investment from cash-rich emerging countries like China and Brazil, a fund that may be managed by the International Monetary Fund.
In a draft of their conclusions, European leaders said the region's banks should raise their tier-one capital ratio - the key measure of financial health - to 9 per cent, but did not give any details on how governments should achieve that if lenders proved unable to raise the funds on the private market.
Having raised the stakes ahead of the summit, Europe's leaders made clear they realised how closely their deliberations were being watched.
"The world is looking at Germany and Europe," Ms Merkel said in a speech to the Bundestag before travelling to Brussels. "It is looking to see if we are ready and able to assume our responsibility, during the worst crisis in Europe since the second world war."
Even Silvio Berlusconi, the Italian premier who had come under intense pressure from his European counterparts to come to Brussels with a detailed plan of how to reform his country's moribund economy, made a last-ditch effort to satisfy other leaders without breaking apart his delicate governing coalition.
After marathon talks with his eurosceptic coalition partner Umberto Bossi, head of the Northern League, Mr Berlusconi came to Brussels with a 14-page letter detailing his intentions. Whether it would be enough to placate leaders who believe much of their effort is aimed at shoring up Italy's sovereign bonds was not immediately clear.
http://www.ft.com/intl/cms/s/0/77d7cb5c-ffec-11e0-ba79-00144feabdc0.html#axzz1bua2jaFZ
