Final decisions on Wednesday

European Union leaders made some progress toward a strategy to fight the Eurozone's sovereign debt crisis on Sunday, nearing agreement on bank recapitalization and on how to leverage their rescue fund to try and stop bond market contagion.

But final decisions were deferred until a second summit on Wednesday and sharp differences persist over the size of losses private holders of Greek government bonds will have to accept.

French President Nicolas Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited European Central Bank funds to fight the crisis. Instead, the Eurozone may turn to emerging economies such as China and Brazil for help in underpinning its ailing bond market.

He indicated that Italy, the Eurozone state now in the markets' firing line, had been told to come up with a more convincing plan this week to implement structural economic reforms and thus increase its growth potential.

Merkel said only two options remained on the table for leveraging the 440-billion-euro ($600-billion) European Financial Stability Facility, and neither involved drawing from the central bank. Van Rompuy said, however, that some form of ECB involvement could not be entirely discounted.

It remains to be seen whether that will convince investors that Eurozone government bonds are safe after expected heavy write-downs on the Greek debt.

Leaders endorsed a broad framework drafted by their finance ministers for recapitalising European banks, which regulators say need between 100 and 110 billion euros to cope with likely losses on Greek and other eurozone sovereign bonds.

With alarm growing in Washington, Beijing and other capitals about potential damage to the global economy, Europe is under pressure to put in place a comprehensive strategy to halt the crisis in time for a November 3-4 G20 summit in France.

They aim to agree on reducing Greece's debt burden, strengthening European banks, improving euro area economic governance and maximising the firepower of the EFSF.

Merkel told reporters that the decisions to be taken on Wednesday would not be the last step to overcoming the crisis.
 

Reuters