BANKING CRISIS:GLOBAL BANKS yesterday pushed back against Europe's drive to impose big losses on Greek bondholders, warning there were limits on what could be achieved via "voluntary" measures to increase private sector participation in the country's rescue.

European negotiators are under pressure to wrap up talks with bank groups before EU leaders press for a definitive deal in Brussels tomorrow night to settle the debt crisis.

There was little sign of a breakthrough yesterday as the Institute of International Finance banking lobby said it continued to “explore options” with the European authorities “which could contribute to a realistic vision for the Greek economy”.

The discussions are complicated by the risk markets might take fright at the effort to cut the burden of the Greek national debt, prompting contagion and a drastic drop in confidence in weakened countries like Ireland.

This limits scope for any compulsory initiative, although the spokesman for EU economics commissioner Olli Rehn would not say whether Europe would pursue that path in the event sufficient voluntary support did not emerge.

“I can only say that our preference is clearly for a voluntary approach,” the spokesman said.

EU leaders want to conclude a deal quickly with the IIF, whose members have large holdings of Greek bonds. The group has been resisting pressure to rework a July deal in which it agreed a 21 per cent voluntary loss for Greek creditors. EU leaders now want to increase the voluntary loss to about 50 per cent.

“There are limits . . . to what could be considered as voluntary to the investor base and to broader market participants,” said IIF managing director Charles Dallara.

“Any approach that is not based on co-operative discussions and involves unilateral actions would be tantamount to default, would isolate the Greek economy from international capital markets for many years, and would impose a harsh burden on the Greek people as well as European taxpayers who have already done a lot to support Greece.

“It would also likely have severe contagion effects, which would cost the European and the world economy dearly in terms of employment and growth.”

EU leaders concluded at emergency talks on Sunday that the burden of Greece’s debt is unsustainable. To limit the risk of contagion from their effort to increase bondholder losses, they have resolved to boost the firepower of Europe’s bailout fund and boost the capital of weakened banks.

The talks between EU leaders have stirred deep political divisions, with French president Nicolas Sarkozy campaigning against any big increase in the 21 per cent “haircut” agreed in July. This stance, rooted in the large exposure of French banks to Greece, appears to have been rejected by his counterparts.

EU leaders gather in Brussels at 6pm tomorrow in a much-delayed effort to finalise the rescue. While this is the effective deadline for a deal with the IIF, finance ministers are due to meet at 9am tomorrow to hammer out the technical elements. Although European markets edged 1.1 per cent higher in anticipation of a deal, investors will not make their judgment until details are unveiled.

Separately, worries about the slowdown in European growth were amplified by data which pointed to a weakening of manufacturing activity. In a further sign of the continued pressure on the euro zone, the European Central Bank had intensified its bond-buying campaign last week. The ECB said it spent €4.49 billion, about twice as much as in the previous week and the highest amount since mid-September.

The bank has acquired €169.5 billion worth of bonds, the targets of such operations being Italy, Spain, Greece, Ireland and Portugal. Outgoing ECB chief Jean-Claude Trichet said yesterday in Berlin that recent turmoil in the euro zone had strengthened the case for a single finance ministry for Europe. “Increasingly, it seems that it is not too bold to consider a European finance ministry, but rather too bold not to consider creating such an institution,” he said.

“I now hear leaders calling for a treaty change to create stronger economic governance at the EU level. I hear euro-area citizens calling for better supervision of the financial sector. And I know that our partners in the G-20 look to Europe as a whole for solutions, not to individual member states.”