The incoming head of the European Central Bank threw the euro zone a lifeline hours before a crucial summit on Wednesday by signalling the bank would go on buying troubled states' bonds to combat market turmoil.
Mario Draghi delivered the message that financial markets have been waiting for about ECB intentions as leaders of the 17-nation single currency area struggled to agree a convincing comprehensive plan to resolve the bloc's sovereign debt woes.
The Eurosystem (of central banks) is determined, with its non-conventional measures, to prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission, he said in typically coded ECB language in a speech text released in Rome.
Draghi, who will succeed Jean-Claude Trichet on November 1, made clear that measures could only be a temporary expedient and said it was up to governments to tackle the roots of the debt crisis that began in Greece two years ago.
However, his statement appeared to rebuff pressure from Germany's powerful Bundesbank for the ECB to end the bond-buying programme which prompted the resignation of the two most senior German ECB policymakers this year.
The second euro zone summit in four days, due to start at 6:30 p.m. British time, seems unlikely to produce a detailed masterplan despite Franco-German assurances that a comprehensive solution to two years of debt turmoil would be found.
The leaders may agree on broad outlines but 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.
A European Commission spokesman said there would not be detailed numbers on all aspects of the political agreement.
While there is consensus on the need for European banks to raise around 110 billion euros (96 billion pounds) in extra capital to withstand a potential Greek debt default and wider financial contagion, two other critical parts of the plan remain unclear.
Governments and banks are still haggling over the scale of write-offs private bondholders will have to take on their Greek debt holdings, sources familiar with the negotiations said.
And uncertainties remain around complex plans to scale up the region's 440 billion euro bailout fund, known as the European Financial Stability Facility, without allowing it to draw on the ECB.
Investors stayed cautious awaiting the summit outcome, with the euro inching higher against the dollar and European shares slightly up on the day.
Having lowered market expectations, euro zone leaders have room to surprise on the upside, but many economists doubt the remedies under discussion will be enough to solve the crisis.
50 PERCENT HAIRCUT?
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 EFSF said its chief, Klaus Regling, would visit China to meet with investors on Friday.
But Chinese and European officials said there was no word yet on whether Beijing, which holds AAA-rated EFSF bonds and an estimated 600 billion euros in euro-denominated debt, would also put money into the SPIV.
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.
German Chancellor Angela Merkel won a parliamentary vote of support for strengthening the rescue fund via leverage after warning in a dramatic speech that Europe was facing its most difficult situation since the end of World War Two.
If the euro fails, then Europe fails, she declared, saying there was no certainty that the continent would then enjoy another 60 years of peace.
Merkel earlier told parliament that private bondholders would have to take a substantial write-down so that Greece's debt could be reduced to 120 percent of gross domestic product by 2020 from 160 percent this year.
Experts say that implies a 50 percent haircut for private investors, which Greek Finance Minister Evangelos Venizelos was reported to have told Greek banks was the most likely outcome.
Citing sources in Brussels, where Venizelos has been meeting bankers, the daily Kathimerini said 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.
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 and the banks wanted a menu of options for the bond swap rather than a single solution.
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, due to start at 1600 GMT 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.
LETTER OF INTENT
Also weighing on the summit was deep concern about Italy, the euro zone's third biggest economy, which is now in the bond markets' firing line.
Rome'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 was bringing 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.
The letter was expected to contain only vague promises of economic reform rather than the firm undertakings sought by exasperated EU leaders in return for support for Italy's bonds.
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 doesn't have enough money to bail Rome out.
Draghi's statement appeared to supersede a dispute between Germany and France over how the ECB, the ultimate defender of the euro, should be involved in trying to resolve the crisis.
Paris had wanted the summit to endorse a continuation of the ECB's non-standard measures as long as Europe faces exceptional circumstances.
Merkel, fighting to secure parliamentary backing for the scaling up of the EFSF, said Germany opposed a line in the draft summit conclusions urging the ECB to continue these measures -- a key backstop against deeper turmoil.
A senior euro zone source said the phrase would be dropped.
(Additional reporting by Annika Breidthardt and Sarah Marsh in Berlin, Daniel Flynn and Harry Papachristou in Athens, Barry Moody in Rome; Writing by Luke Baker and Paul Taylor; editing by Janet McBride)