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Reducing Greece's debts is sticking point as leaders struggle to bring together grand plan
BRUSSELS (AP) ' European leaders appeared unable to bring together all the parts of their promised grand plan to contain the debt crisis on Wednesday night, despite progress on key elements, as they struggled to persuade banks to agree to bigger losses on Greek debt.
The leaders are under immense pressure to finalize their plan after multiple delays and half-baked solutions. Market confidence was waning and fears were growing that the 2-year-old crisis could push Europe and much of the developed world back into recession.
The heads of government did make progress on two parts of their three-pronged plan. They agreed to force big banks across the continent to raise euro106 billion ($148 billion) by June to better weather the turmoil, and a senior official said they had also neared a deal to boost their bailout fund to over euro1 trillion ($1.4 trillion).
Strengthening Europe's banks and using the bailout fund to protect larger economies from being swallowed up in the turmoil are crucial to getting a grip on the crisis that threatens the future of the euro, the common currency that is at the heart of Europe's postwar unity.
But as negotiations among the leaders of the 17 countries that use the euro pushed into the early hours of Thursday, they were still struggling come up with the final part of their plan ' a way to drastically reduce Greece's crushing debts, which are on track to top 180 percent of economic output.
German Chancellor Angela Merkel told lawmakers in Berlin that the goal was to bring Greece's debt down to 120 percent of economic output by 2020. That would imply a cut of more than 50 percent to the face value of Greek bonds and may be more than private investors would be willing to accept voluntarily.
Others, including France, the European Commission and the European Central Bank are in favor of a softer deal with banks, stressing that any solution will have to be voluntary to avoid creating even more market panic.
French President Nicolas Sarkozy, Merkel and IMF chief Christine Lagarde met with representatives of the banks lobby group earlier in the night, but no deal was reached, a eurozone official said.
"There has been no agreement on any Greek deal or a specific 'haircut,'" Charles Dallara, the managing director of the Institute of International Finance, said in a statement. "We remain open to a dialogue in search of a voluntary agreement. There is no agreement on any element of a deal."
The lack of a deal on Greece could sink the entire summit in Brussels since each prong of the plan depends on the other two.
That interconnectedness has long complicated efforts to come up with a grand plan. It wasn't clear if the leaders failed again to agree on all three prongs, if they would be able to announce details of a partial one.
Heather Conley, director of Europe program for the Center for Strategic and International Studies, said it was hard to know if what had come out so far would be enough to reassure markets.
"Will the sound of 1 trillion euros do the trick and 'wow' the markets or will the markets perceive this as smoke and mirrors?" she asked. "If the past two weeks tell us anything, it has been that the market is hoping for final resolution."
The fear is not only that markets will turn volatile, but that the economic and political impact will be huge, costing hundreds of thousands of jobs and undoing decades of work to bring Europe's once-warn torn nation states closer together.
"Our challenge today is not simply to save the euro. It's to safeguard the ideals we cherish so much in Europe: peaceful cooperation amongst our nations, social cohesion and solidarity without prejudice amongst our people," said George Papandreou, the prime minister of Greece, whose country kicked off the continent's debt drama almost two years ago.
Still, after much delay, talks on increasing the effectiveness of the bailout fund finally saw some progress. The eurozone leaders hope that the euro440 billion European Financial Stability Facility can serve as a firewall that will stop the crisis from engulfing big countries like Italy and Spain. The question was how to do it with the most impact and the least risk for taxpayers.
A senior eurozone official said that consensus was emerging to allow the EFSF to insure private investors against the first 25 percent of losses on purchases of government bonds and other investments linked to helping the eurozone.
After contributing to the bailouts of Ireland, Portugal and Greece, the EFSF will have only about euro270 billion left. A scheme to provide insurance on bond issues could multiply the impact of the EFSF's lending power to over euro1 trillion, the official said, since it would make those bonds safer investments and attract demand.
The official, who was speaking on condition of anonymity because negotiations were still ongoing, cautioned however that the EFSF leveraging would not be agreed until other parts of the plan were nailed down.
In addition to acting as a direct insurer of bond issues from wobbly countries like Italy and Spain, the EFSF insurance scheme is also supposed to entice big institutional investors to contribute to a special fund that could be used to buy government bonds but also to help states recapitalize weak banks.
Such outside help may be necessary for Italy and Spain, whose banks were facing some of the biggest capital shortfalls.
Using the insurance promise, the eurozone also hopes to attract big institutional investors from outside the eurozone, such as sovereign wealth funds, to contribute to a separate fund that would back up the EFSF.
Sarkozy was due to speak to Chinese President Hu Jintao on Thursday. On Friday, the head of the EFSF Klaus Regling will travel to China, which has huge cash reserves, to detail the insurance set-up.
DiLorenzo contributed from Paris. Associated Press writers Juergen Baetz and Geir Moulson in Berlin, Raf Casert, Don Melvin and Robert Wielaard in Brussels, and Sylvie Corbet in Paris also contributed to this report.