European Leaders Struggle to Resolve Debt Crisis at Summit

Posted October 26th, 2011 at 3:35 pm (UTC-5)
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European leaders struggled Wednesday to reach agreement on a plan to resolve the continent's burgeoning debt crisis as they opened their second summit this week in Brussels.

While the broad outlines of a debt-relief plan were apparent, the details were not.

German Chancellor Angela Merkel said there were “still many problems to settle,” while Luxembourg Prime Minister Jean-Claude Juncker said the heads of state would likely not be able to resolve all aspects of a deal.

One provision of the plan — how much banks holding Greek debt must forgive of the money the Athens government owes them — was proving particularly difficult to resolve. European leaders are asking the banks to take as much as a 60 percent loss on the securities, with the banks offering much less.

Hours after the summit started, news agencies reported that Mrs. Merkel and French President Nicolas Sarkozy planned to meet personally with bank officials Wednesday night in an attempt to reach an accord on the extent of the losses the banks would have to absorb.

The European heads of state are attempting to resolve a two-year-long debt crisis that in recent weeks has roiled international financial markets fearful of a Greek default on its obligations and the spread of the debt contagion to bigger European economies in Italy and Spain.

The gravity of the moment was apparent, with Mrs. Merkel earlier in the day telling the German parliament that it is Europe's “most serious crisis since the end of World War Two.”

At her urging, the German lawmakers approved a sharp increase in the continent's bailout fund to assist debt-ridden countries. The parliament voted overwhelmingly to more than double the size of the fund to about $1.4 trillion. That gave Mrs. Merkel new clout as she headed to the late-day summit in the Belgian capital.

She called on banks holding Greek debt to forgive 50 percent of the amount the Athens government owes so that it can regain its economic footing over the coming decade.

But agreement on terms of the debt-relief plan has proved elusive, leaving some analysts to question whether the heads of state will be able to keep their pledge to complete the plan on Wednesday.

Drafts of the plan call for European banks to forgive billions of dollars of debt for Greece — perhaps $243 billion or more — and to sharply increase their own cash reserves by about $150 billion. At the same time, the size of the continent's bailout fund would be boosted to assist other debt-ridden countries.

Greek Prime Minister George Papandreou called the impending decisions “a critical time,” requiring European leaders to “remain clear-headed and calm.”

The financial institutions agreed last July to write off 21 percent of the Greek debt they hold and have offered to raise that to 40 percent. But negotiations over terms of a deal appeared stalemated.

While the immediate focus has been on debt-ridden Greece, Mrs. Merkel and Mr. Sarkozy pressed Italian Prime Minister Silvio Berlusconi to move faster to adopt new economic reforms to stave off the need for an Italian bailout.

By late Tuesday, Mr. Berlusconi reached agreement with his Northern League coalition partner on austerity measures to send to the European Union ahead of the summit. The governing coalition agreed to cut spending by gradually increasing the country's retirement age to 67 by 2025.