Prospects for a comprehensive deal to resolve the euro zone debt crisis at a summit on Wednesday looked dim, with disagreements remaining on critical aspects including how to give the region's bailout fund greater firepower.
EU officials and European diplomats lowered expectations of a breakthrough when the 17 euro zone leaders meet from 6:30 p.m. BST, despite Franco-German assurances that a comprehensive solution to two years of debt turmoil would be found by the end of the month.
The leaders may agree only on broad outlines and leave crucial details, including the numbers on a Greek debt write-down and on funds available for financial fire-fighting, for later negotiation among finance ministers.
While there was wide consensus on the need for around 110 billion euros (96 billion pounds) to be injected into the European banking system to withstand a potential Greek debt default and wider financial contagion, there was little clarity on either of the other two critical parts of the plan.
Governments and banks were still arguing hours before the summit over the scale of the writedown private bondholders will have to take on their Greek debt holdings, sources familiar with the negotiations said.
And many uncertainties remain around complex plans to scale up the region's 440 billion euro ($600 billion) bailout fund, known as the European Financial Stability Facility, without allowing it to draw on the European Central Bank.
Investors stayed cautious ahead of the summit outcome, with the euro holding steady against the dollar and European shares little changed.
One proposal set to be adopted involves creating a special purpose investment vehicle (SPIV) to tap foreign sovereign and private investors, such as Chinese and Middle Eastern wealth funds, to buy bonds of troubled euro zone countries.
The European Union delegation in Beijing said the head of the EFSF, Klaus Regling, would visit China on Friday.
The other proposed method for scaling up the EFSF involves using it to offer partial guarantees to purchasers of new euro zone debt. The two options may be used in combination.
50 PERCENT HAIRCUT?
Greek Finance Minister Evangelos Venizelos was reported on Wednesday to have told Greek banks the most likely outcome of the negotiations was a 50 percent haircut for private bondholders, who would receive cash and new bonds in return for the debt.
Citing sources in Brussels, where he has been meeting bankers, the daily Kathimerini said under this scenario banks would receive 15 euros in cash and 35 euros in 30-year bonds with a 6 percent coupon for every 100 euros of debt they own.
The exact proportion of bonds and cash could still change, it said.
Banking sources and EU officials told Reuters the banks had so far offered a 40 percent reduction in the net present value of their holdings, while governments had initially sought a 60 percent voluntary write-down on the notional value.
Jean-Claude Juncker, the chairman of euro zone finance ministers, forecast an eventual deal on a 50 percent write-off, but officials said it might not come in time for Wednesday's summit.
European leaders' pattern of responding too little, too late to the debt and banking woes has turned it into a wider economic and political crisis that threatens to undermine the euro single currency and the European Union project.
Financial markets have been hoping for weeks that the summit, scheduled to start at 4:00 p.m. BST with a gathering of all 27 EU leaders, will yield a detailed overall solution on how to combat the debt crisis.
But EU sources said figures may not materialise until November 7-8, when EU and eurozone finance ministers hold their next regular meeting.
Further complicating Wednesday's talks, which will be preceded by a meeting of senior finance officials and central bankers to try to hammer out a meaningful agreement, was intense market pressure on Italy and a dispute in Germany.
LETTER OF INTENT
Italy's inability to deliver a substantive plan for reforming its pensions system has raised doubts about Prime Minister Silvio Berlusconi's seriousness in tackling a crisis that threatens the euro zone's third largest economy.
Berlusconi will bring to Brussels a letter of intent to his European partners on long awaited reforms, aides said, after his government nearly collapsed on Tuesday over their demands that Rome fulfil a pledge to raise the retirement age.
Italy has the euro zone's largest sovereign bond market, with a public debt of 1.8 trillion euros, 120 percent of GDP. EU leaders fear that failure to make its debts more sustainable will mean it goes the same way as Greece, Ireland and Portugal, which have had to accept EU/IMF financial aid programmes.
The rescue fund does not contain enough money to bail out Italy.
Diplomats said Germany was likely to get its way against France in a stand-off over how much the European Central Bank, the ultimate defender of the euro, should be involved in trying to resolve the crisis.
Paris wanted the summit to endorse a continuation of the ECB's non-standard measures such as buying troubled states bonds as long as Europe faces exceptional circumstances.
Chancellor Angela Merkel, fighting to secure parliamentary backing for the euro zone rescue measures, particularly the scaling up of the EFSF, said Germany opposed a phrase in the summit's draft conclusions urging the ECB to maintain these measures -- a key backstop against deeper turmoil.
Many analysts believe the ECB is the only institution with the financial firepower to convince nervous and sceptical markets that the crisis can be contained.
A draft non-binding resolution to be adopted by the German parliament on Wednesday says there will no longer be any need for the ECB to buy bonds in the secondary market now that the EFSF has its new powers and leverage possibilities.
Locking the ECB out could prove another negative but EU diplomats said they expected incoming ECB President Mario Draghi to maintain the bond purchases as long as necessary.
(Additional reporting by Michael Martina in Beijing, Annika Breidthardt and Sarah Marsh in Berlin, Daniel Flynn and Harry Papachristou in Athens, Phil Pullella in Rome; Writing by Luke Baker and Paul Taylor; editing by Janet McBride)