BRUSSELS: European leaders at a Brussels summit Sunday on the eurozone crisis face several key issues -- how to reduce Greece's debt mountain, how the EU's bailout fund should work and how to recapitalise banks.
REDUCING GREEK DEBT
Leaders have had most of the technical work done already.
Eurozone finance ministers on Friday agreed to unlock a much-needed eight-billion-euro ($11-billion) tranche of aid to debt-wracked Greece, after international auditors gave the green light to Athens's reform programme.
This sixth slice of aid will be released in mid-November once approval from the International Monetary Fund is formalised. The loans are from a bailout package agreed in May 2010 that is already out of date.
Finance ministers also agreed that a second bailout package drawn up in July, but since overtaken by events, would go ahead if banks accept a write-down on their Greek government bond holdings of "at least 50 percent." The July deal had put this debt reduction at 21 percent.
Negotiations are ongoing with the banks, with the second series of eurozone, EU and IMF loans likely to cost more than originally planned. The 109 billion euros envisaged in July for Athens would rise to 114 billion euros if a 50-percent debt "haircut" is agreed.
This is the most difficult point, with the main players clashing over how best to maximise the 440-billion-euro European Financial Stability Facility (EFSF) set up after the May bailout last year which has already helped Ireland and Portugal, and is due to figure in the second Greek rescue.
Discussions are ongoing over ways to leverage the fund -- making its effective lending capacity bigger without actually increasing the size of government guarantees, which would be politically untenable in Europe's paymaster Germany.
Two complementary ideas are under discussion -- using the EFSF to insure investors against future potential losses on the bonds of troubled countries; and creating a new 'fund within the fund,' which would use seed money from EFSF and offer inducements, particularly to emerging nations, to invest in eurozone recovery.
Depending on which road is chosen -- the Dutch cited "big differences" among EU states on the best way forward -- the EFSF could muster at least one trillion euros, which EU officials hope will restore confidence on financial markets and give them a powerful weapon to overcome the debt crisis.
To deal with losses banks would incur after the expected write-down of Greek debt, ministers agreed on Friday that governments would offer an ultimate backstop for lenders to shore up their reserves to prevent the crisis rapidly becoming a banking crisis.
The EU calculates about 108 billion euros will be needed to make sure banks meet a raised threshold of nine percent for for core, Tier 1 capital -- that is reserves which a bank can tap most quickly. Once again, the exact terms still have to be finalised with the banking community, especially on implementation dates.
The IMF had estimated earlier that the banks could need 200 billion euros.
The main player in the talks, German Chancellor Angela Merkel, has found her room for manoeuvre hampered by parliamentarians who want to sign off on any proposal before she presents them to her EU colleagues.
This was one of the main reasons Paris and Berlin announced there would be a second summit on Wednesday, following the EU summit on Sunday that was originally supposed to clinch an accord.
Merkel said "definitive decisions" would be set in stone on Wednesday.