Euro zone finance minsters have tonight approved the payment of an €8 billion tranche of bailout funding to Greece that will potentially avert a disastrous default.
The ministers, who met in Brussels to begin a crucial week for the euro zone, also said they were working on a second rescue package for Greece. Any new initiative is likely to include fresh aid as well as contributions from the private sector.
Speaking ahead of the meeting, Minister for Finance Michael Noonan said the ministers were seeking a "comprehensive solution" to the debt crisis and hoped to "make decisions about Greece".
A push by France to use more European Central Bank money to fight the euro zone debt crisis ran into strong resistance from Germany and other EU partners earlier today. France tonight appeared to retreat on its plans on how to expand the power of Europe's bailout fund.
An earlier view that the European Financial Stability Facility should get a banking license enabling it to borrow from the European Central Bank was "not a definitive point of discussion for us," French finance minister Francois Baroin told reporters in Brussels.
"What matters is what works," he added, suggesting some grounds for flexibility toward finding a fix to the single currency's debt woes.
Euro zone leaders will meet twice - on Sunday and Wednesday - to try to adopt a comprehensive strategy to fight the crisis that has spread to Ireland and Portugal since beginning in Greece and is now threatening to engulf bigger economies.
German Chancellor Angela Merkel, French President Nicolas Sarkozy and Europe's top two officials, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso, will also meet late tomorrow to try to break the deadlock before the Sunday summit.
Berlin and Paris have appeared at loggerheads on two core elements of a plan to build a firewall around Greece and stabilise bond markets - how to scale up the European Financial Stability Facility and how to reduce Greek debt.
Mr Sarkozy appeared isolated after an acrimonious meeting in Frankfurt on Wednesday in seeking to turn the €440 billion EFSF rescue fund into a bank able to access ECB liquidity to fight contagion.
Germany, the ECB and the European Commission all argued that the move would violate an EU treaty prohibition on monetary financing of governments.
"The path is closed for using the ECB to ease liquidity problems," Merkel told conservative lawmakers in Berlin, according to participants at the private meeting.
Taoiseach Enda Kenny today dismissed talk of a "last chance" at the summit on Sunday, saying he believed it would be possible for agreement to be reached in Brussels at the weekend, and for leaders who need to get the backing of their own national parliaments to do so in time for a second summit meeting on Wednesday.
Meanwhile, a summit between the European Union and China that was scheduled for next Tuesday in China has been postponed, an EU source said today. The summit was due to discuss trade relations, the euro zone crisis and the November G20 meeting. The official gave no reason for the decision.
German finance minister Wolfgang Schaeuble hammered home Berlin's message at a preparatory at the meeting of euro zone finance ministers in Brussels tonight, telling reporters: "We will stick to the situation as it is in the treaty, that the central bank is not available for state financing”.
A German government spokesman said major decisions at the two-part meeting would only come on Wednesday. Dr Merkel needed time to secure parliamentary support under new rules that stipulate that the Bundestag's budget committee must approve all key EFSF decisions.
The summits' outcome will determine whether investor confidence in the euro area can be restored. It will also influence whether an expected Greek debt write-down triggers a chain reaction of financial turmoil across Europe.
As a first step, EU leaders are set to endorse a plan on Sunday to strengthen banks' capital base and may also launch a procedure for longer-term reform of the euro area's economic governance, EU sources said.
European banks will be required to increase their core tier one capital ratio to 9 per cent by July 2012 to help them withstand losses on sovereign debt, banking sources said.
EU officials said the total amount required was just short of €100 billion. Those banks that cannot raise money on the markets will have to turn to national governments.
France fears its credit rating could come under threat if the wrong method is chosen to scale up the bailout fund to prevent contagion spreading to Italy and Spain, the euro zone's third and fourth largest economies.
Ratings agency Standard & Poor's said today it was likely to downgrade France and four other states if Europe slips into recession. It was the second agency this week to cast doubt on France's rating after Moody's on Tuesday.
Agencies
