October 24th, 2011
01:13 PM GMT
Brussels (CNN) – Here in Brussels Europe's heads of government talked their way through lunches, dinners and various press conferences at the weekend as they moved closer to finalizing a 'grand plan' to end the eurozone's sovereign debt crisis.
Despite hours of hard talk, the outcome was decidedly soft, with politicians promising that progress had been made and details remaining sketchy at best.
Leaders of the union's 27 countries are trying to hammer out a plan to restore fiscal order among the 17 of its member states that share the euro as their common currency-collectively known as the eurozone.
The most pressing issue on the table is how to deal with a disorderly default of Greece but the focus has also shifted to Italy, amid concerns that this larger, core eurozone country could become the next victim of the world's volatile credit markets.
Italian Prime Minister Silvio Berlusconi was given an ultimatum by the leaders of Germany and France to rein in public spending ahead of Wednesday's deadline to finalize a collective crisis response.
In a joint press conference Angela Merkel and Nicolas Sarkozy laughed nervously when asked if they had confidence in Berlusconi. The French President said: "How can I put it? We have confidence in the financial, political and economic institutions of Italy."
Providing reassurances about the sustainability of Italian debt is essential to stave off a possible bankruptcy of other nations that – just like Lehman Brothers – are deemed too big – or too expensive – to fail.
To achieve this goal the chiefs of government must find a "lasting" and "credible" solution to three, interdependent problems, namely:
- Boosting the EFSF, or eurozone bailout fund, to ring fence a Greek default
- Writing down part of Greece's debt via a "haircut" imposed on investors
- Recapitalizing Europe's banks to counter the effect of such write downs on their capital
Still, the dialogue has been marred by differences of opinion about how to go about achieving those aims.
France wants the EFSF to become a bank so that it can avail itself of the liquidity provided by the ECB to financial institutions.
Germany says that goes too far. On Sunday Merkel said the treaties did not provide the ECB being involved.
When it comes to the "haircut" on Greek debt, the EU agreed in July to propose a voluntary write down worth around 21% for investors of Greek debt.
It is now likely though that bondholders will have to lose more and share the increased burden of bailing Greece out.
The question is how much?
Germany wants 50%, maybe even 60%, whilst France is concerned about the effects of such a write down on the balance sheets of its banks, many of which hold large swathes of Greek holdings. In the meantime the fate of France's coveted AAA credit rating hangs in the balance.
As EU leaders wrapped up this seemingly endless round of summits, they promised a solution would be in place on Wednesday, "no question!" as EU Parliament President Jerzy Buzek put it.
If they don't reach one by then, this crisis threatens to be come not just European but global and that could well make for some stronger language when many of shake hands with their G20 colleagues in France next month.
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