BRUSSELS Leaders of the 17 euro zone countries will meet again in Brussels on Wednesday to finalize a "comprehensive strategy" to try to resolve the region's sovereign debt problems.
After reaching broad agreement on strengthening banks in the first part of the summit on Sunday, here are the main decisions they are likely to take on Wednesday to tackle a crisis that has raged for nearly two years and threatens the world economy.
EU member states accepted a European Banking Authority finding that about 100 billion euros ($135 billion) is needed to strengthen European banks, protecting them against losses on Greek debt and any wider contagion.
Private investors will be responsible for stumping up the funds first but if that proves insufficient, national governments will have to step in.
Only as a last resort will the euro zone bailout fund, known as the European Financial Stability Facility (EFSF), be used to provide funds to governments to help shore up the banks.
Final details will be approved by finance ministers on Wednesday and banks will be given until June 2012 to bolster balance sheets.
ECONOMIC GOVERNANCE AND SURVEILLANCE
Euro zone leaders have agreed on stricter rules for keeping their national finances in check, including fines for those that breach a debt limit of 60 percent of gross domestic product (GDP) and a budget deficit limit of 3 percent of GDP.
There will also be closer monitoring of national budget plans to better coordinate macroeconomic policies across the single currency bloc.
Some of the decision-making structures in the EU, including how to manage the Eurogroup, which brings together finance ministers from the euro zone, will be altered. There will also be twice-yearly euro zone summits, so that leaders can work more closely on economic coordination.
Euro zone leaders are considering further steps to strengthen economic convergence and fiscal discipline, including possible treaty changes to allow a right of intervention in delinquent euro zone governments' national budgets.
EU leaders asked European Council President Herman Van Rompuy to report to them in December on the issue.
EUROPEAN FINANCIAL STABILITY FACILITY
The EFSF, set up last year and so far used to bail out Portugal and Ireland, is a 440 billion euro fund that is based on guarantees from all euro zone member states and raises capital on international markets by issuing bonds. It is triple-A rated.
Financial markets are not convinced it is big enough to handle deeper debt problems in Italy and Spain and euro zone leaders are now trying to come up with ways to scale the fund up, without increasing the guarantees governments have made.
France wanted to turn the EFSF into a bank so it could borrow from the European Central Bank at low interest rates and lend to countries but backed down on Sunday after Germany and the ECB opposed this as a breach of the EU treaty.
Leaders are now considering two options, possibly in tandem, which would entail using the fund to provide guarantees on a portion of any new debt issued in the euro zone, and creating a special purpose investment vehicle (SPIV) to draw in foreign sovereign and private investors.
Under the insurance plan, if Italy and Spain issued new debt at auction, the EFSF could guarantee 20-30 percent of any losses that investors might take in the event of default -- a way of trying to build confidence and convince financial markets that it is safe to buy euro zone debt.
The EFSF would cover the first part of losses of the SPIV, which would be able to grant loans to euro zone sovereigns and buy bonds in the primary and secondary markets, according to a working paper obtained by Reuters.
However, analysts warn the plan is fraught with dangers. Investors could switch to the guaranteed bonds in preference to debt already trading in the secondary market, where borrowing costs would likely be pushed higher. The SPIV is intended to counter this risk, but may be a hard sell to foreign funds entrusted with increasing national wealth.
Failure to agree on comprehensive steps will fuel concerns in financial markets that leaders are incapable of mastering the crisis, piling more pressure on Italian, Spanish and other debt markets.
THE ORIGINAL PROBLEM: GREECE
Leaders will also attempt to reach agreement on a new package of aid for Greece, which is already receiving 110 billion euros of loans from the EU and International Monetary Fund.
The second rescue package, originally intended to be 109 billion euros, is now likely to be larger, EU officials indicate, although it's not clear by how much.
A deal on a second package was first struck on July 21, when it was also agreed that Greece's private sector creditors would voluntarily write down the value of their bond holdings by around 21 percent, providing Greece with debt relief of 50 billion euros between now and 2014. However, that deal has unraveled and will have to be renegotiated by Wednesday.
Governments are pressing for the private sector to accept a "voluntary" writedown of 50-60 percent, although it will still be a total debt reduction of 50 billion euros by 2014 because of the fall in the debt's market value.
Banks were reluctant to renegotiate the deal, which is likely to leave them with bigger losses on their books, but have offered a 40 percent writedown, banking sources said.
The IMF is more skeptical about whether a voluntary "haircut" will be enough, presenting a scenario that would require a 60 percent reduction in the value of debt to make Greece's situation sustainable in the medium term.
While some experts argue such deep losses for bondholders would draw a line under the Greek problem, the move could panic owners of Italian and Spanish, pushing the bloc into even deeper crisis. ($1 = 0.730 Euros)
(Writing by Luke Baker and Paul Taylor; Editing by Ruth Pitchford)