Eurozone agrees to €1 trillion bail-out

Europe’s leaders intend to multiply their bail-out fund “several fold” to €1 trillion (£869billion) and press Greece’s creditors to accept losses of over 50 per cent on their bond investments, it emerged last night at an emergency summit in Brussels.

In a draft statement, they said the eurozone planned to do this by strengthening the European Financial Stability Facility (EFSF) which currently stands at £383bn, although details of how this would be done had yet to be filled in.

“Further enhancements to the EFSF and its resources are possible through co-operation with the IMF,” the draft statement said. International Monetary Fund involvement would have an impact on British taxpayers.

It also added that Spain could do more to tackle its burgeoning budget deficit, but a paragraph on the state of Italy’s economy was left blank.

Prime Minister David Cameron said: “We made some good progress tonight. It’s very much in Britain’s interests that we sort out these problems and solve this crisis.

“We have made good progress on the bank recapitalisation. That wasn’t watered down, it has now been agreed. It will only go ahead when the other parts of a full package go ahead and further progress on that needs to happen.”

However, negotiations over how much of a writedown the private sector must take on Greek debt stalled late last night- after the Institute for International Finance said no agreement was reached.

The leaders of the richest countries in the 17-member eurozone, France and Germany, are still arguing over how best to calm nervous markets and ensure the financial contagion does not spread to the banking sector.

Ahead of the summit, German chancellor Angela Merkel raised the stakes by warning that stability in Europe could not be taken for granted.

Speaking to the German Bundestag, she said Europe faced its toughest period since the Second World War.

“No-one should take it for granted that there will be peace and affluence in Europe in the next half-century,” she said.

“The world is watching Germany and Europe to see if we are ready and able to take responsibility. If the euro fails, Europe fails.”

The conclusions from the meeting in the draft statement confirmed approval of the first of three key agreements – strengthening the liquidity of the most exposed banks in Europe.

The recapitalisation of Europe’s vulnerable banks – none in the UK – involves increasing their reserves by more than £87bn (€100bn).

An official statement from EU leaders said banks must increase the capital they hold to 9 per cent of their net worth.

The extra money is supposed to be raised from private investors, but if that is not possible the top-up may have to come from the EFSF – meaning eurozone governments would have to use more of their taxpayers’ cash to bail out economies that threaten to default on their debts.

However, experts are already estimating that the recapitalisation figure is not high enough. They say half as much again will be needed to shore up banks sufficiently to satisfy global markets.

The deal on recapitalisation remains subject to final agreement on the other two parts of the economic package being thrashed out – a much bigger bail-out fund for the eurozone and a writing-off of debts.

Belgian Prime Minister Yves Leterme said of the bail-out fund: “I think that effectively, it has to be able to intervene a good deal beyond €1 trillion.”

With the departure from the talks of the ten non-eurozone leaders, including Mr Cameron, last night, the remaining 17 were settling in for a night of negotiations on the complex financial mechanism that will be needed to reach the target figures the EU hopes will calm market fears that not enough is being done to solve the crisis.

Last night’s conclusions on recapitalisation also set a target date of 30 June, 2012.

The statement said: “Banks should first use private sources of capital … if necessary national governments should provide support and, if this support is not available, recapitalisation should be funded via a loan from the EFSF in the case of the eurozone countries.”

Despite the progress made at the 27-leader meeting, the second and third key accords are the key issues to be settled by the eurozone leaders. Ahead of the eurozone summit, the German parliament voted in favour of strengthening the EU’s bail-out fund – a boost for Mrs Merkel.

Disputes over efforts to leverage the existing bail-out fund of £383bn to above £869bn (€1 trillion) may have receded thanks to the German parliament vote, although a figure has not been finalised.

Figuring out these parts of the plan – the cuts to Greek debt and the bail-out fund changes – is necessary before the new rules on bank capital buffers can come into effect.

“A bank recapitalisation without any remaining element – such as the firewall, to name one example – would not have any chance of success,” said Polish finance minister Jacek Rostowski.

If it is agreed, it should demonstrate determination to respond to any more Greek-style meltdowns. A decision is still awaited on a demand that private investors – mainly banks – absorb at least a 50 per cent write-off of their loans to Greece. A consortium of global banks has so far suggested 40 per cent, which was rejected.

Meanwhile, the spectre of a debt-laden Italy was hanging over the talks, with prime minister Silvio Berlusconi facing demands to act on austerity measures in return for financial aid.

The fear is that a Greek-style crisis in Italy will be totally unaffordable for Eur-ope, and make the scale of financial support for Athens look like pocket money.