Europe's leaders face huge expectations to come up with nothing less than a grand plan to save the euro — and protect the global economy from another recession — when they meet for three days of emergency talks this weekend.
Some 22 months after the crisis first exploded in Greece, investors are still criticizing European leaders for acting only when markets demand it. With markets volatile, economic growth ebbing, and social unrest rising, the heads of government and finance ministers meeting in Brussels from Friday need to show they can finally get ahead of events.
They will have to manage expectations on the one hand but also convince volatile bond and currency markets that the euro will survive the crisis.
A new plan is expected to cover three main points — debt reduction for Greece, new capital for ailing banks that might take losses from Greek bonds, and enhanced financial firepower for the bailout fund to stabilize markets.
Heading into the talks, however, there was still disagreement over each of the measures.
After a week of cautious optimism, "the market is right to be more nervous," said analyst Jane Foley at Rabobank. "There is a huge amount of ground to be covered by euro politicians."
The meetings kick off on Friday, when eurozone finance ministers gather, with the finance ministers of the full European Union in talks on Saturday, and the heads of state and government on Sunday.
The bailout fund, the European Financial Stability Facility, needs more lending capacity to backstop big countries such as Spain and Italy by buying their bonds and holding down interest costs that threaten to their finances.
The fund was just expanded to 440 billion euros ($608 billion) in lending power. But with some 287 billion euros of that already committed to bailout out Greece, Ireland and Portugal, the fund is considered too small and economists say it may need effective lending power of up to $2 trillion.
Proposals to stretch its lending power — without asking governments for more money — include various kinds of leverage, such as having it guarantee part of the value of Italian and Spanish debt.
The eurozone crisis was caused by governments piling up too much debt, raising fears they might not pay it back. Default concerns have driven borrowing costs beyond what some countries can afford. Greece, Portugal and Ireland have been cut off from bond lending and needed bailouts from the eurozone governments and the International Monetary Fund.
The European Central Bank has been propping up Italian and Spanish bonds by buying them in the secondary market, driving down interest rates. It's a risky task it wants to hand off to the EFSF. It's not clear when that might happen, though.
ECB officials have balked at allowing the EFSF to use the bank's money to magnify its lending power. Some eurozone officials, meanwhile, want to use the EFSF to help backstop continued ECB bond purchases. The ECB's power to create new money means it in theory has almost unlimited financial firepower — but that is a step it has so far refused to take.
German Finance Minister Wolfgang Schaeuble said Thursday that the "outlines" of how to step up the bailout had been agreed with France but fell short of a comprehensive deal to the crisis that financial markets appear to have come to expect.
"We are cautious, but think that we will be able to agree on these," he said at a news conference in Berlin. "Germany and France are in complete agreement on this question, but we know that is not the same as a European solution."
A hastily called meeting Thursday night in Frankfurt, Germany among Schaeuble, German Chancellor Angela Merkel, French President Nicolas Sarkozy and the heads of the International Monetary Fund and the European Central Bank ended without any statement.
Other complex and related questions include the extent of the losses bondholders should face to cut Greece's debt to level where it can be repaid. Since that would inflict losses on banks, officials are trying to come up with a mechanism to get banks Europe-wide to add to their financial cushions.
That's difficult because banks are mostly regulated at the national level, and because raising capital cushions is a painful process that can divert money from bonuses and dividends or mean selling riskier but more profitable assets.
A deal agreed in July would cut the value of bondholders investments by 21 percent, but economists and eurozone leaders now say that won't be enough, even with a second, euro109 billion bailout.
Managing expectations has been a key aspect of the meeting. Stocks and the euro have rising since a Group of 20 finance ministers' meeting last weekend urged eurozone leaders to quickly address its debt crisis before it derails the global economy. But the optimism from that may set up a sudden market downfall if the results of the summit disappoint.
The euro has rallied from euro1.3145 on Oct. 4 to $1.3731 on Thursday, boosted by expectations that politicians are finally ready for decisive action.
German officials tried earlier this week to dampen expectations, and on Thursday, Merkel tried to balance between reassuring markets that something will be done and not overpromising.
She said the leaders' summit on Sunday "will not be the end point of regaining trust. It will be a point at which we act, but much more will follow."
European Central Bank head Jean-Claude Trichet, who was getting a ceremonial farewell at the Frankfurt event that later turned into a platform for the meeting, was blunter. Europe needs "immediate action," he said.
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