Berlin tempers summit hopes, banks under pressure

Germany warned on Monday that a summit of EU leaders next Sunday would not produce a miracle cure for the eurozone's sovereign debt crisis, pushing down markets that have risen in the past week on expectations of a breakthrough. German Finance Minister Wolfgang Schaeuble told a conference in Duesseldorf that European governments would adopt a five-point plan at the Brussels meeting to address the turmoil that has clouded the outlook for the global economy.
This is expected to include a plan to recapitalise banks and reduce Greece's debt mountain by asking the country's private creditors to accept steeper writedowns on their holdings than the 21-percent losses agreed last July. But Schaeuble cautioned that the meeting would not yield a "definitive solution" for the crisis that started in Greece two years ago and has since spread across the 17-nation bloc, leading some experts to predict a break-up.
His comment weighed on the euro, which fell one percent against the dollar after hitting a one-month high earlier in the day. European stocks also fell. Ahead of a 48-hour general strike in Greece that is expected to bring the country to a standstill just as parliament votes on a new set of controversial austerity measures, Greek Prime Minister George Papandreou appealed for unity.
"This is maybe the most crucial week for Greece and Europe," he said during a meeting with the Greek president. Hours later, however, a deputy from Papandreou's party quit his seat in protest against what he called "unjust" steps. The lawmaker will be replaced by another socialist, so Papandreou's 4-seat majority in the 300-strong assembly remains unchanged.
Greece's overall debt is forecast to climb to 357 billion euros this year, or 162 percent of annual economic output - a level economists agree is unsustainable. To reduce this mountain, eurozone leaders are racing to convince banks to accept "voluntary" writedowns of up to 50 percent on their sovereign holdings. At the same time, they are trying to agree on a blueprint for recapitalising financial institutions at risk from the deepening crisis.
"Determining how the writedowns will be applied and the source of funds to recapitalise the banks will require arduous negotiations between now and the deadlines the EU has set for itself," said Dan Morris, global strategist at J.P. Morgan Asset Management.