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European talks over crisis plan enter final stretch as details emerge on bailout fund
BERLIN (AP) ' Talks over the eurozone's promised plan to save the euro and avert a potential global recession entered their final 24-hour stretch on Tuesday, with markets worldwide expecting a convincing strategy to be presented at a European leaders' summit Wednesday.
The plan is expected to include three parts ' lightening Greece's debt load through write-offs, getting banks to raise new money to protect themselves from losses on the Greek bonds, and boosting the bailout fund's powers.
While progress on writing off Greece's debt load was still slow, key details have emerged on how to boost the powers of the eurozone's bailout fund to shield large economies like Italy from market turmoil.
A document obtained by The Associated Press shows the currency zone wants to boost the euro440 billion ($600 billion) bailout fund to have a lending capacity more than euro1 trillion ($1.39 trillion).
That would be achieved by offering sovereign bond buyers insurance against possible losses and by attracting capital from private investors and sovereign wealth funds.
Eurozone governments have been using the European Financial Stability Fund, or EFSF, to protect countries such as Italy and Spain from being engulfed in the debt crisis. To keep doing that, however, it needs to be bigger or have its lending powers magnified.
Leading German opposition lawmakers were briefed Monday by Chancellor Angela Merkel on the plan.
The draft document by the eurozone working group ' which Germany's government was sharing with key lawmakers Monday ' did not provide a headline figure for the bailout fund.
The German parliament will vote on the measures before Wednesday's EU summit in Brussels, which is set to adopt the new rules for the EFSF.
Some concern remained, however, that the changes to the EFSF might not be enough.
The new powers "can maybe help on a short-term basis but is certainly not the firepower that is needed to stabilize on a medium term the markets," Guy Verhofstadt, the head of the liberal faction of the European Parliament, said Tuesday.
The enhanced bailout fund rules are meant to guarantee "continued market access of euro area member states under pressure and the proper functioning of the sovereign debt market," the document said.
Therefore the EFSF is set to have the ability to provide investors with partial insurance against losses from its member states' government bonds, thus making them a safer and more attractive investment.
The eurozone document also foresees setting up one or several special investment vehicles that would partly compensate possible losses on sovereign bonds in a bid to attract outside investors such as sovereign wealth funds, combining "public and private capital to enlarge the resources available."
The draft document stressed that the EFSF would "benefit from the flexibility to deploy both options, which are not mutually exclusive."
The insurance model is designed to increase the demand for newly issued eurozone government bonds, and lower the yields. That would keep borrowing rates low for governments when they needed to tap markets to raise cash. Spiraling yields on debt issued by Greece, Portugal and Ireland eventually cut them off from market financing, forcing them to relay on emergency loan packages.
Before the eurozone sets up the EFSF insurance scheme, however, leaders want to make sure that states likely to request such support are actually using the time it buys to overhaul their economies.
Under most pressure to demonstrate such commitment is Italy.
The president of the European Commission, Jose Manuel Barroso, and EU Council President Herman Van Rompuy are still awaiting a letter from Italian premier Silvio Berlusconi detailing plans to reign in spending and get the country's economy growing again. The letter is expected before eurozone leaders meet Wednesday in Brussels.
The letter has to contain "concrete action" and "a clear time horizon," said commission spokesman Amadeu Altafaj Tadio. In particular, the eurozone is looking for plans to overhaul the pension system, improve the legal investment environment and other measures to enhance economic growth, Altafaj Tardio said.
"What happens in Italy has an impact on all other eurozone countries," he said.
Any assistance from the fund for member states would come with strings attached and the "appropriate monitoring and surveillance procedures," the document said.
Greece, for example, must implement harsh austerity measures in return for last year's euro110 billion bailout.
While plans to boost the bailout fund and give banks new capital seemed roughly in place Tuesday, talks to get Greece's private bondholders to take bigger losses were proving more difficult.
The private bondholers agreed in July to accept losses of 21 percent on their holdings, and are resisting a proposal that they voluntarily take deeper losses to lighten the country's debt load.
Experts agree that Greece needs to write off more of its debt ' German officials have said up to 50 or 60 percent ' if it is ever to climb out of its debt hole.
But many say such a deal with private creditors needs to be voluntary. Imposing sharp losses on the banks through a so-called haircut could trigger massive bond insurance payments that could cause panic on financial markets.
Charles Dallara, managing director of a global banking lobby group currently negotiating a wider Greek debt reduction with eurozone officials in Brussels, cautioned that "there are limits to what could be considered as voluntary."
He insisted that any approach not based on cooperative discussions but unilateral actions would be tantamount to a Greek default, isolating the country from capital markets for years.
"It would also likely have severe contagion effects, which would cost the European and the world economy dearly in terms of employment and growth," Dallara said in a statement.
Melissa Eddy and Geir Moulson in Berlin contributed to this report.