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Key deal to resolve euro bailout in doubt

HOPES for a grand plan to solve the European debt crisis were fading ahead of last night's emergency summit in Brussels, with France and Germany still at odds over the rescue package and Italy's coalition government facing potential collapse over differences on austerity.

HOPES for a grand plan to solve the European debt crisis were fading ahead of last night's emergency summit in Brussels, with France and Germany still at odds over the rescue package and Italy's coalition government facing potential collapse over differences on austerity.

Fears of a double-dip global recession rose as a meeting of the European Union's 27 finance ministers that had been planned for the start of the summit was cancelled.

The leaders of the EU countries were still set to meet overnight to discuss rescue proposals non-euro countries such as Britain are keen to ensure they are not disadvantaged by any deal and then the 17 members of the single-currency euro zone were to meet to vote on final measures.

The prolonged political hand-wringing over the 18-month debt crisis produced near despair among some EU diplomats. One official told The Guardian: "Everybody realises that we are on the brink of such a total catastrophe that anything that prevents it and a huge recession must be grasped. The markets will kill us if they haven't laughed themselves to death."

The rescue proposals have three pillars: persuading creditors to give up hope of being repaid a large proportion of Greek debt (known as a write-down or a "haircut") injecting more money into Europe's banks so they can withstand the shock waves of a Greek default and boosting the euro zone's bailout fund, the European Financial Stability Facility, so that it can cope if larger debt-ridden economies such as Spain or Italy need to call upon it.

There seems to be agreement that banks should get ?108 billion ($A144 billion) to increase their capital base so they will not have to freeze lending if they lose large amounts of money over Greece.

But the other two strands of the deal are facing hurdles. Private creditors are reportedly resisting pressure by the European Commission and the European Central Bank to accept haircuts of up to 60 per cent, three times the 21 per cent agreed to in July. Banks have offered 40 per cent and warned that anything more would endanger the banking system.

The size of the debt write-down must be decided before the final figure of the boost to the bailout fund, which could go as high as ?2 trillion, can be calculated.

Meanwhile, German Chancellor Angela Merkel and French President Nicolas Sarkozy are again at loggerheads over whether the European Central Bank should buy up more Spanish and Italian bonds to support those countries. Dr Merkel rejected a draft summit communique that appeared to suggest this measure should continue.

Dr Merkel faces strong domestic opposition to the ECB's bond-buying. Germans fear it will lead to inflation and compromise the central bank's independence.

The two leaders are united, however, in their insistence that Italian Prime Minister Silvio Berlusconi arrive at the summit with his divided coalition pulled into line behind a plan to slash Italy's ?1.9 trillion debt.

On Tuesday, negotiations with Mr Berlusconi's Northern League coalition partner over pension reform and an increase to the retirement age had broken down so badly that it was thought Italy might face an election over the issue.

Northern League leader Umberto Bossi said he was "pessimistic" about the government's survival.


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