Hopes of a deal on eurozone crisis fade

WHAT'S HAPPENED?
Hopes of a deal to rescue struggling eurozone countries are fading fast following the cancellation of a meeting of European Union finance ministers which was scheduled for this morning. Markets, which had been making gains against speculation that a deal was imminent, fell across the world last night and this morning.
An emergency summit of EU leaders will go ahead in Brussels today, but without the key technical data hoped for from the finance meeting.

WHAT DOES IT MEAN?
It is thought the meeting of EU finance ministers was cancelled because of disagreements over the extent of the losses that should be imposed on Greece’s creditors when the much-trailed 'partial default' happens. The current level is set at 21 per cent, but Germany wants a write-off of up to 60 per cent – a level that the European Central Bank is dead against.

EU leaders agree that European banks must raise more than €100bn of new capital to protect against any future losses and that the European Financial Stability Facility - the eurozone bailout fund - should be increased.

The EFSF currently stands at €440bn, but this is thought to be insufficient in the event that Spain and Italy – the eurozone’s third largest economy – also require bail outs.

France wants the ECB to provide loans that would increase the EFSF bailout fund to €3 trillion. But Germany is against this.

BBC business editor Robert Peston says the likely alternative - the EFSF providing guarantees of up to 20 per cent of loans given by investors to struggling eurozone countries - will force the EU to use "complicated financial engineering that may only boost the [bailout] capacity to about €1 trillion".

Key to the success of today's emergency talks will be Italian prime minister Silvio Berlusconi's plans to reduce his country’s near-€2 trillion public debt. He is due to present his measures before the summit.

WHAT NEXT?
The most that can be hoped for at the emergency summit today is that leaders can agree on headline issues. The technical details of any deal will have to wait at least until a meeting of EU finance ministers at the weekend.

However, EU leaders will have to provide some hope for the markets if the reaction of one EU diplomat is anything to go by. He 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." ·