New summit as Germany and France fail to agree on EFSF
European leaders will now have to hold a second summit next Wednesday, because of the inability of Germany and France to reach a deal on how to increase the firepower of the eurozone's €440bn rescue fund.
Deep divisions between France and Germany mean they will make scant progress on strengthening the eurozone bailout fund at a summit on Sunday.
France and Germany said in a joint statement that European leaders would discuss a global solution to the crisis on Sunday but no decisions would be adopted before a second meeting to be held by Wednesday at the latest.
The major sticking point is over how to scale up the European Financial Stability Facility, a €440bn fund.
France and Germany disagree over the best way to bolster the facility, with Paris fearing its triple-A credit rating could come under threat if the wrong method is chosen.
Failure to agree on leveraging the EFSF will further damage confidence in the eurozone's ability to tackle its debt crisis after nearly two years of trying to get on top of a problem that started in Greece and now threatens Italy, Spain and even France, not to mention the broader global economy.
In their effort to agree a comprehensive resolution plan, eurozone leaders are striving to agree new steps to reduce Greece's debt, strengthen the capital of banks exposed to weak sovereign debt and leverage the EFSF to stem contagion to bigger economies.
The communique, issued after French President Nicolas Sarkozy and German Chancellor Angela Merkel spoke by telephone yesterday, said Paris and Berlin wanted negotiations to start immediately with the private sector over its contribution to a sustainable plan for Greece's mountainous debt.
The statement suggested little progress had been made in that area either.
Despite the divisions on the EFSF, EU leaders have made headway on another critical element in tackling the crisis -- the recapitalisation of European banks -- while a draft statement for Sunday's summit showed eurozone countries would make rules to limit budget deficits and public debt part of national legislation by the end of next year.
EU officials said all 27 member states had agreed that just short of €100bn was required to bolster bank balance sheets.
"The figure has been discussed with member states. It is now acceptable for everybody," an EU source said.
Banks will be required to come up with the capital from shareholders first, and if that fails than national governments will provide the support.
Only as a last resort will the EFSF be used to recapitalise institutions.
A deal on bank capital clears one hurdle ahead of Sunday, but at least three others remain -- a deal on a revised second bailout package for Greece, the extent of the private sector's involvement in that, and the EFSF's structure.
The IMF and the EU also do not see eye-to-eye over the sustainability of Greek debts, with the IMF concerned that EU projections may be too optimistic and that deeper debt reduction is needed, EU sources told Reuters.
Despite the differences of opinion, EU and IMF inspectors are expected to go ahead and approve an €8bn aid payment to Greece next month.