EU sets new bank rules, struggles over crisis plan

By Sarah Dilorenzo

Associated Press

Published: Wednesday, Oct. 26 2011 12:00 a.m. MDT

British Prime Minister David Cameron speaks with the media as he prepares to leave an EU summit in Brussels on Wednesday, Oct. 26, 2011. Chancellor Angela Merkel won the support of German lawmakers to increase the firepower of the eurozone's bailout fund Wednesday and indicated that private investors like banks should take losses of at least 50 percent on their Greek debt holdings.

Yves Logghe, Associated Press

BRUSSELS — European countries will force their largest banks to quickly increase their capital buffers as part of a grand strategy to solve the continent's debt troubles, but leaders gathered at a crisis summit struggled to agree on the other key parts of the plan.

Strengthening Europe's banks is key to finally getting a grip on the debt crisis that has roiled the continent for almost two years and threatens the future of the euro, the common currency that is at the heart of Europe's postwar unity.

Fears that financially weak countries like Greece, Ireland and Portugal — and even larger economies like Italy and Spain — could default on their borrowings has eroded confidence in Europe's banks, which own much of those countries' debt in the form of bonds.

The hope is that forcing banks to value those bonds close to what they would sell for on the market, and at the same time make them expand their rainy-day funds, will help prevent a credit crunch similar to the one created in 2008 by the collapse of U.S. investment bank Lehman Brothers.

However, the plan to recapitalize banks, much of which had been known for several weeks, was the easiest part of a broader package designed to end the debt crisis.

Leaders of the 17-country eurozone continued to fight over two other elements — reducing Greece's massive debts and increasing the firepower of the eurozone's bailout fund so it can effectively stop the crisis from spreading.

The fear is that more delays and half-baked solutions could push not only Europe, but much of the rest of the developed world back into recession, eliminate hundreds of thousands of jobs and eliminate decades of bringing Europe's once-warn torn nation states closer together.

"Our challenge today is not simply to save the euro. It's to safeguard the ideals we cherish so much in Europe: peaceful cooperation amongst our nations, social cohesion and solidarity without prejudice amongst our people," said George Papandreou, the prime minister of Greece, whose country kicked off the continent's debt drama almost two years ago.

Greece's debt — on track to top 180 percent of economic output — was also the most fought-over issue at the summit.

Until now, the eurozone has failed to reach a deal with the country's private creditors, big banks and investment funds, to accept significant losses on their Greek bondholdings. That in turn has triggered disputes among the currency union's members.

German Chancellor Angela Merkel told lawmakers in Berlin that the goal was to bring Greece's debt down to 120 percent of economic output by 2020. That would imply a cut of more than 50 percent to the face value of Greek bonds and may be more than private investors would be willing to accept voluntarily.

Others, including France, the European Commission and the European Central Bank are in favor of a softer deal with banks, stressing that any solution will have to be voluntary to avoid creating even more market panic.

Merkel's Austrian counterpart Werner Faymann told reporters that a cut of "40 to 50 percent is part of the debate," signaling that even Germany's traditional ally was taking a more flexible stance.

Doubts also remained over the third and final issue on the table: How to give the eurozone's bailout fund, the €440 billion ($612 billion) European Financial Stability Facility, the firepower it needs to stop the crisis from engulfing large economies like Italy and Spain and help keep big banks from collapsing in the worsening market turmoil.

"I think that effectively, it has to be able to intervene a good deal beyond €1 trillion ($1.4 trillion)," Belgian Prime Minister Yves Leterme said of the bailout fund, also known as the EFSF.

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