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Eurozone ministers and leaders have played down hopes of a bazooka solution' to the region's debt crisis, as divisions between France and Germany over how to involve banks in a second Greek rescue and boost the bloc's rescue fund continue to plague negotiations. A duo of 23 October summits designed to put an end to the turmoil on debt and equity markets will continue on 26 October after German Chancellor Angela Merkel failed to get the requisite mandate she needed from her parliament to sign up to any decisions - the first tangible after-effect of last month's decision by the country's Constitutional Court to hand the Bundestag final say over future bailouts.

Eurozone finance ministers, kicking off the series of weekend meetings on 21 October in the afternoon - which also include an Ecofin meeting of all 27 finance ministers and a General Affairs Council of Europe ministers, on 22 October - were not in buoyant spirits, with Eurogroup Chair Jean-Claude Juncker saying the image the infighting had left on other countries was "disastrous". "It does not appear a bright example of superior statesmanship and in the future we will have to talk about how we can transform the view that other people have of us," he said.

According to draft conclusions from the euro summit, leaders intend to pledge their "strong determination to do whatever is required to overcome the present difficulties," including continuing to provide aid to bailout countries. But how large a contribution to ask of private investors (banks, insurance companies and pensions funds) as part of a multibillion euro second Greek rescue continues to cause tensions, with the International Monetary Fund now at odds with the EU and ECB over how large the writedown of sovereign debt would need to be to ensure Athens' solvency. "If we go towards stronger participation of the private sector in certain national programmes, we are still perhaps going to need additional efforts," Belgian Finance Minister Didier Reynders said, adding that the European Central Bank might need to provide back-up to weaker states.

The issue is central to deciding what levels of capital banks should be asked to hold as part of a move to bolster the sector, Irish Finance Minister Michael Noonan told reporters. "It's all interrelated," he said. "Whatever the level of PSI is in Greece has a kickback effect into the recapitalisation of the banks, and that also is connected to the possibility of creating a firewall, so it's not possible to take one of these agenda items on their own because they're all moving parts of the same solution." The European Banking Authority, the EU's watchdog, is set to suggest a new temporary capital level of around 9.5% for the EU's largest banks, although Noonan said this could be as low as 7%.

The future of the European Financial Stability Facility presents the largest stumbling block for leaders, with Germany insisting that it not be leveraged via the ECB. "The central bank is not available for state financing," German Finance Minister Wolfgang Schauble said, while Austrian Finance Minister Maria Fekter said the idea of turning the EFSF into a bank backed by the ECB was "long off the table". The central idea being touted by Germany seems to be to use the fund as a first-loss insurance provider, guaranteeing between 20% and 40% of weaker states' bond sales.


Europolitics will be covering the summits on 23 October, as well as the ministerial meetings (Eurogroup, Ecofin and the General Affairs Council, on 21 and 22 October), with updates available online at www.europolitics.infoa

Draft euro summit conclusions

1. Budgets: Weaker countries to sign up to more severe budget cuts. Aid for Greece under its first bailout and private sector involvement in the second had yet to be decided as Europolitics went to press

2. Rescue funds: At Europolitics press time there was still no accord on how to leverage the 440 billion euro European Financial Stability Facility

3. Bank recapitalisation: A new temporary minimum capital level for the bloc's largest banks is expected to be set between 7% and 9.5%

4. Economic surveillance: Leaders will pledge to introduce binding balanced budget rules, consult the Commission before making major fiscal reforms and give the Eurogroup the right to recommend weaker states beg funding from the EFSF

5. Governance: Leaders agree to hold twice yearly summits of eurozone leaders, probably chaired by European Council President Herman Van Rompuy, and will consider appointing a permanent full-time president of the Eurogroup to replace Jean-Claude Juncker when his term ends next year

6. Further integration: Van Rompuy will be tasked with drawing up a list of reforms, including those that require treaty change, by June 2012
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Publication:European Report
Date:Oct 24, 2011

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