EU leaders hope to strike agreement on a “grand bargain” deal to end the sovereign debt crisis on Wednesday night after a weekend of difficult emergency talks on the debacle in Brussels.
With the most crucial decisions postponed for three days, the talks wrapped up after 12 hours late last night after euro zone countries advanced a plan to impose big losses on Greece’s private bondholders.
Sources said the talks were very challenging, as leaders sought to minimise the risk of contagion on markets as result of the Greek intervention.
“I want to tell you that the issues we are facing are of mind-boggling technical complexity because they require huge sums of money to be dealt with,” said French president Nicolas Sarkozy.
The Irish bailout proved that Europe’s rescue campaign was working, Mr Sarkozy added.
“Ireland was a country that was standing on the brink of the precipice when the 2008 crisis hit us, and yet Ireland today is a country that is almost out of troubled waters, almost out of the crisis.”
A loss of 50 per cent or 60 per cent is in prospect for Greek investors, fuelling anxiety about of the risk of further market turmoil.
To avert that threat, EU leaders will expand the firepower of Europe’s bailout fund and recapitalise vulnerable banks.
“I’m more hopeful than when I came out this morning that by Wednesday we will be able to have moved this process along to a point where decisions can actually be made,” Taoiseach Enda Kenny said.
“There was clearly an understanding that the world is watching Europe, and clearly an understanding that there isn’t any point in doing this in a half-hearted fashion.”
Speaking on RTÉ radio this morning, Tánaiste Eamon Gilmore said the Government's view was that changes to EU treaties were "not necessary."
"It's not going to be a case of whatever Angela Merkel says Enda Kenny will do. 27 heads of state will be at that meeting on Wednesday and they will decide collectively. A range of measures were decided on yesterday including that the treaties might be looked at. It was no more than that," he said.
Ms Merkel again raised the sceptre of changes to the European Union treaty to harden governance and fiscal rules during yesterday’s summit, saying such a development should not be “taboo”.
The leaders told EU negotiators to continue talks on a new Greek deal with the Institute of International Finance, the lobby which acts for the world’s biggest banks.
This is the most sensitive element of the new package, which will also include a €108 billion boost for European banks.
This deal is done but will not be made public until the rest of the plan is finalised. Irish banks are unlikely to need new capital.
The leaders are discussing an increase in the bailout fund’s firepower to about €1 trillion, up from some €440 billion. However, many European governments fear that may not be big enough.
This may be achieved by providing first-loss insurance when euro zone countries issue sovereign bonds.
Alternatively, Europe may create a new “special purpose vehicle” to provide such insurance.
This vehicle would be set up as a subsidiary of the bailout fund, using money from private investors and sovereign wealth funds to intervene in bond markets.
In addition, the International Monetary Fund (IMF) is preparing a plan to create a separate fund to use money from emerging economic powers like China, Brazil and India to invest in euro zone countries.
At the insistence of British prime minister David Cameron, the leaders of the 10 non-euro countries will meet euro zone leaders on Wednesday to review the package before the deal is signed off. The debt crisis has had a “chilling effect” on all 27 EU members, Mr Cameron said.
In spite of entrenched divisions last week between Mr Sarkozy and Dr Merkel, the two leaders presented a unified front at a joint press conference.
“France and Germany sing from the same hymn-sheet and express their determination to implement the same policy, that is the very basis of everything we are doing,” Mr Sarkozy said.
Dr Merkel spoke in similar terms, but stressed that the new rescue plan will not stamp out the crisis definitively.
“What we are up against is not a crisis of our currency, which is why Wednesday will not be the last step,” she said.
“The negotiations with the banks have only just started so I have to rule out completely any sort of speculation as to how this will turn out to be.”
European Council president Herman Van Rompuy said the bailout fund’s expansion will be achieved without increasing the guarantees of member states.
EU leaders pressed Italian premier Silvio Berlusconi to tackle his country’s ailing public finances. Asked if Italy resolved to do this, EU Commission chief José Manuel Barroso said: “All member states need to give clear signals of their commitment. That is understood by everybody.”