* French ramped up pressure for big deal at EU summit
* Merkel unlikely to change cautious approach
* Progress seen on banks, Greek haircut; EFSF tricky
By Madeline Chambers
BERLIN, Oct 20 Exhausted by two years of crisis,
Europe and its trading partners are hoping Chancellor Angela
Merkel will ditch her customary caution and sign up to a "big
bang" solution at Sunday's EU summit -- but she is unlikely to
The German leader, accused by her critics of worsening the
euro zone's debt debacle with her hesitant approach, has tried
to dampen expectations of the meeting.
"Government debts were built up over decades and that's why
they won't be removed in one summit," she warned this week,
saying the meeting would be just one of several important steps.
French President Nicolas Sarkozy, however, has heaped
pressure on Merkel by declaring that Europe's fate would be
determined in the days to come.
Share markets and the euro fell on Thursday due to doubts
about the leaders' ability to come up with a comprehensive plan
to solve the debt crisis at Sunday's meeting, the latest in a
series billed as crucial for the euro zone's future.
"It is again the week of all weeks, the summit of all
summits. It is again crunch time in Brussels on Sunday," wrote
Carsten Brzeski, senior economist at ING.
EU leaders are set to tackle three questions -- bank
recapitalisation, a bigger writedown of Greek debt and a
possible leveraging of the European Financial Stability Facility
(EFSF) bailout fund to boost its effectiveness.
France and Germany are at odds on how the fund could be
Sarkozy's tough words, however, are unlikely to outweigh
domestic pressure on Merkel, leader of Europe's biggest economy
and the biggest contributor to the EFSF, not to sign a blank
cheque for struggling euro zone members.
"I don't think they can meet expectations. The summit will
fall well, well short of the kind of big bang needed to reassure
the markets," said Simon Tilford, chief economist at the Centre
for European Reform in London.
Tilford fears markets will react badly next week. "By the
time the Germans finally budge, it'll be too late," he said.
The summit's timing is crucial. It is only a matter of weeks
before Greece may go bankrupt, which could cause billions in
losses for European banks, especially in France.
On top of that, credit rating agencies have compounded fears
about the crisis spreading. Moody's this week downgraded Spain's
debt rating and cast doubt on France's triple A credit rating.
Merkel's wait-and-see, tactical approach to politics helped
her gain and hold on to power, and she is unlikely to change her
style now. She struggled to contain a rebellion within her
centre-right coalition last month in a parliamentary vote on the
EFSF bailout fund and her popularity has slid in opinion polls
along with that of her party.
Most of all, she cannot afford to deepen discontent by
signing off on a deal that would burden German taxpayers more.
Given domestic disgruntlement about the cost of the
bailouts, Merkel is unlikely to pay much attention to critics at
home and around the world who accuse her of exacerbating the
"We should have written down Greek debt a year-and-a-half
ago," said Sigmar Gabriel, leader of the opposition Social
Democrats. "Now everything is much, much more expensive."
Many analysts agree Merkel has been part of the problem.
"The trouble is that the longer they delay a comprehensive
solution, the more difficult it becomes politically because the
costs are rising exponentially," said Tilford, arguing that a
fundamental problem has been Berlin's narrow analysis of the
causes of the crisis.
The slow progress can also be put down to lack of chemistry
between the energetic, shoot-from-the-hip Sarkozy and the dour,
Their regular talks have repeatedly exposed rifts on
economic policy which they have tried to paper over with vague
declarations such as plans for a European economic government.
On Sunday, Merkel, Sarkozy and the other EU leaders will
have to come up with more than platitudes to calm markets.
Leaders are likely to agree to ask private investors to
shoulder greater losses on holdings of Greek government debt
than the 21 percent already agreed. They will probably also
insist that banks must recapitalise and meet a 9 percent core
capital target to make sure they are strong enough to absorb
losses on sovereign debt and weather possible recession.
Boosting the firepower of the EFSF probably poses the
biggest problem for Merkel.
Trying to reassure voters that leveraging up the fund would
not involve more taxpayers' money, Merkel and Finance Minister
Wolfgang Schaeuble have ruled out boosting it beyond 440 billion
euros, with 211 billion euros from Germany.
The scale of the deadlock on the EFSF became apparent on
Wednesday when Sarkozy rushed to Frankfurt to talk to Merkel as
his wife was giving birth. It seems little progress was made.
Germany is still dead set against France's favoured solution
of turning the EFSF into a bank which could then access funding
from the European Central Bank.
In any case, Merkel's hands are tied on the EFSF.
A Constitutional Court ruling last month gave a bigger say
to German lawmakers in euro zone bailouts. Parliament's budget
committee now has to approve changes to the EFSF's guidelines.
An agreement on Sunday may not even be a done deal if
Germany's budget committee has not approved it. This could even
stall the talks as Merkel may feel obliged to consult the
committee, on standby to meet at short notice, first.
There are, though, signs that Merkel has realised the scale
of the problem. In an apparent response to stinging criticism
from former Chancellor Helmut Kohl, once her mentor, Merkel has
started to talk up the benefits of the euro and the EU.
"The pressure is increasing but the Germans are putting
energy into it now," said Ulrike Guerot, a senior fellow at the
European Council on Foreign Relations.
She pointed to contingency plans for a possible Greek
bankruptcy, including bank recapitalisation steps. "There is no
big bang. We will not wake up overnight and have it fixed. But
things are moving now."