* Draft statement talks of leveraging bailout fund "several
* Says details to be decided in November
* EU source says leaders looking to Greek debt writedown in
excess of 50%
* Italy promises to raise pension age, provide economic
By Luke Baker and Julien Toyer
BRUSSELS, Oct 26 Europe's leaders intend to
multiply their rescue fund fourfold to one trillion euros and
press Greece's creditors to accept losses of over 50 percent on
their bondholdings, but the details of their plan to end the
debt crisis are still not fully formed.
A draft statement from an emergency euro zone summit on
Wednesday, obtained by Reuters, outlined two options to leverage
the 440 billion euro ($600 billion) fund designed to shore up
heavily indebted states and thwart market attacks.
If the draft is adopted with little change, the second
summit in four days will have sketched broad intentions but
failed to produce a detailed master plan to scale up the fund,
recapitalise banks and reduce Greek debt to a sustainable level.
"It's moving in the right direction but it is going to
disappoint the market, particularly given the emphasis policy
makers put on this meeting," said Jessica Hoversen, foreign
exchange analyst at MF Global in New York.
One proposal involves creating a special purpose investment
vehicle (SPIV) to tap foreign sovereign and private investors,
such as Chinese and Middle Eastern wealth funds, to buy bonds of
troubled euro zone countries.
The other method for scaling up the European Financial
Stability Facility, which was set up last year, involves using
it to offer partial guarantees to purchasers of new euro zone
debt. The two options could be used simultaneously and the
International Monetary Fund could also help.
Euro zone finance ministers will be asked to finalise the
terms and conditions in November, the statement said.
EU sources said the EFSF was expected to be leveraged by
something like a factor of four giving it scope of around 1
trillion euros. It has about 250-275 billion euros available
given funds set aside for aid to Greece, Ireland and Portugal
and for recapitalising the region's banks.
European leaders' pattern of responding too little, too late
to a debt crisis that began in Greece has spawned a wider
economic and political crisis that threatens to undermine the
euro single currency and the European Union project.
A senior EU source said the euro zone leaders want private
sector creditors to accept a writedown of more than 50 percent
on their holdings of Greek government debt in order to reduce
Greece's total outstanding private sector debt by around 100
While there is consensus on the need for European banks to
raise around 110 billion euros ($150 billion) in extra capital
to withstand a potential Greek debt default, governments and
banks are still haggling over the scale of write-offs.
In an effort to push through the deal, French President
Nicolas Sarkozy and German Chancellor Angela Merkel are prepared
to meet with bankers on Wednesday night to negotiate
face-to-face, the senior source said.
EU leaders agreed the outlines of a package on bank
recapitalisation, including raising the core capital ratios of
European banks to 9 percent by the end of June 2012, but they
did not provide a headline figure, which will depend in part on
negotiations over Greece and its second bailout package.
"There will be give and take with the banks until the last
minute," a Greek government source involved in the Brussels
Sarkozy is also expected to talk with Chinese President Hu
Jintao soon on Chinese participation in the EFSF bailout fund.
Mario Draghi, the incoming head of the European Central Bank
threw the euro zone a lifeline hours before the summit,
signalling the ECB would go on buying troubled states' bonds as
leaders of the 17-nation single currency area struggled to agree
a convincing set of measures.
"The Eurosystem (of central banks) is determined, with its
non-conventional measures, to prevent malfunctioning in the
money and financial markets creating an obstacle to monetary
transmission," he said in typically coded ECB language in a
speech text released in Rome.
Draghi, who will succeed Jean-Claude Trichet on Nov. 1, made
clear that measures could only be a temporary expedient and said
it was up to governments to tackle the roots of the debt crisis
that began in Greece two years ago.
However, his statement appeared to rebuff pressure from
Germany's powerful Bundesbank for the ECB to end the bond-buying
programme which prompted the resignation of the two most senior
German ECB policymakers this year.
It also appeared to supersede a dispute between Germany and
France over how the ECB, the ultimate defender of the euro,
should be involved in trying to resolve the crisis.
Merkel won a parliamentary vote of support for strengthening
the rescue fund after warning in a dramatic speech that Europe
was facing its most difficult situation since the end of World
"If the euro fails, then Europe fails," she declared, saying
there was no certainty that the continent would then enjoy
another 60 years of peace.
Merkel told parliament that private bondholders would have
to take a substantial write-down so that Greece's debt could be
reduced to 120 percent of gross domestic product by 2020 from
160 percent this year.
Experts said that implied a 50 percent "haircut" for private
Also weighing on the summit was deep concern about Italy,
which is now in the bond market firing line.
Under huge pressure from its euro zone partners, Rome
promised a package of reform steps to boost growth and control
its public debt, including labour and pensions reforms and
additional revenues from property divestments.
In a letter sent to the summit in Brussels, the government
said it would produce a plan of action to boost growth by Nov.
15, promising to raise the retirement age to 67, cut red tape
and modernise state administration to improve conditions for
business and raise 5 billion euros a year from divestments and
improved returns from state property.
Rome's inability to deliver a substantive plan for reforming
its pensions system has raised doubts about Prime Minister
Silvio Berlusconi's seriousness in tackling a crisis that
threatens the euro zone's third largest economy.
Italy has the euro zone's largest sovereign bond market,
with a public debt of 1.8 trillion euros, 120 percent of GDP. If
it went the same way as Greece, Ireland and Portugal, the rescue
fund would not have enough money to bail Rome out.