EU Leaders Struggle To Agree At Eurozone Summit

German Chancellor Angela Merkel (left) and French President Nicolas Sarkozy have been helping draft a plan to boost the eurozone rescue fund.

BRUSSELS -- It looks increasingly likely that EU leaders have failed to agree on a comprehensive solution to the eurozone crisis during a summit in Brussels that looked set to go into the wee hours of the morning.

But leaders did agree on the bare bones of an agreement, which includes a write-down of Greek debt, the beefing up of the currency zone's 440 billion-euro ($600 billion) rescue fund, the European Financial Stability Facility (EFSF), and a recapitalization of Europe's banks.

Details about exact figures were vague.

Polish Prime Minister Donald Tusk measured his words at a press conference after representatives of the 10 non-eurozone-member states left the remaining 17 to continue a discussion that also is expected to last well into the morning.

"If you ask me whether the eurozone group will agree on everything tonight, then I would be very cautious to say yes," Tusk said. "I think that we are very close to a comprehensive political deal but a few very important issues may need more time."

Even his Swedish counterpart, Fredrik Reinfeldt, played down hopes that a comprehensive solution would be achieved after the October 26 meeting.

"It should not surprise us that this is technically very difficult. This is reflecting enormous values. I think it is better to do it thoroughly in a way which creates long-term confidence in the markets," Reinfeldt said.

"Concerning the political solution, this is better than doing it quickly, therefore it might need more time before the final solution is in place."

Another summit this weekend -- which would be the third in seven days -- has been discussed but it is likely that finance ministers will be left to flesh out the definite text when they meet on November 7.

Finance ministers were initially supposed to meet before the heads of government of the 27 member states to lay the groundwork for a decision but the lack of progress made that meeting superfluous and added to the market jitters.

'Fine-Tuning' Needed

Although no official numbers have been mentioned it is believed that 90 of Europe's largest banks will have to boost their capital buffers by close to 110 billion euros ($153 billion) in the coming nine months. The banks are meant to primarily raise money from the markets before turning to bailouts from national governments, with the EU ready to step in as a final resort.

Tusk said that the exact number needed for the bank recapitalization would be agreed first after the other items on the agenda are resolved. "It cannot function as an independent project without the coming steps we are waiting for," he said.

He said the other items were the Greek write-down and the increased firepower of the EFSF and the three are interlinked.

He added, "The extent of a recapitalization is impossible to know without also fine-tuning the size of private-sector involvement in cutting Greek debt and determine the size of the new size of the EFSF."

The EFSF is able to raise cheap cash for bailouts because of the triple-A credit rating of France and Germany. So far, it has been used to bail out smaller eurozone countries such as Greece, Ireland, and Portugal. But it's too small to save larger economies like Italy or Spain, which are both at risk of being sucked into the crisis.

German Chancellor Angela Merkel won the support of her parliament to strengthen the euro fund after warning in a speech that Europe was facing its most difficult situation since World War II. "If the euro fails, then Europe fails," she said.

Fighting Over 'Haircuts'

EU leaders are attempting to boost the firepower of the EFSF to between 1 trillion and 2 trillion euros ($1.4 trillion-$2.8 trillion) through elaborate financial engineering but the exact number is likely to be established later.

There are two ways to do this that are being discussed. The first is to turn the fund into an insurance scheme, in which the EFSF could guarantee a certain percentage -- most likely 20 percent -- of fresh debt issues. The other would be to create a separate fund linked to the EFSF which would raise money from private investors, such as Chinese sovereign-wealth funds.

The biggest question mark, however, concerns the size of the losses, referred to as "haircuts," that the banks must accept for holding Greek debt.

It is clear that it will be much higher than the 21 percent agreed at a previous summit in July.

Germany and the Netherlands have been pushing for a figure of around 60 percent and the International Monetary Fund (IMF) has argued for a figure as high as 75 percent.

France has been pushing hard to keep the number at 40 percent, noting that the country's banks own a large amount of Greek debt. Paris is backed by the International Institute for Finance, the trade association of the world's banks, which is refusing to budge from a maximum of a 40 percent cut.

It also remains to be seen whether the haircut will be voluntary or forced.

Berlusconi Under Fire

Ahead of the summit there was also increased pressure on Italian Prime Minister Silvio Berlusconi to deliver on structural changes after receiving severe criticism from fellow eurozone leaders.

Italy has made cuts to public spending but not reformed its recalcitrant economy sufficiently.

On October 26 it appeared that Berlusconi's junior coalition partner, the Northern League, had given up on its objection to increase the retirement age from 65 to 67 as long as those who have been working and paying into the pension system for 40 years still will be able to retire.

The move might save Berlusconi for now but fears remain in Brussels that the slow pace of reform still might force Italy to seek a bailout.