EU leaders put pressure on Italy in crisis talks

Merkel said eurogroup decisions could be expected only by Wednesday European leaders on Sunday opened talks aimed at nailing down a solution to the worst economic crisis in its history, as the spotlight fell on Italy amid ongoing contagion fears in the eurozone. In the run-up to the summit, keenly watched around the world as concerns grow that the eurozone debt crisis could spark global recession, European leaders appeared to be ironing out differences and inching towards a deal.
But the key player, German Chancellor Angela Merkel, tamped down expectations for a Sunday breakthrough, telling reporters as she arrived: "We should not expect eurogroup decisions today but rather on Wednesday."
Eurozone leaders will meet again then in an effort to finalise a deal to restructure Greece's debt, shore up European banks, build up a war chest against contagion and agree a plan to prevent a repeat in the future.
The heads of state and government aim to present a framework agreement on Sunday which they hope will reassure jittery markets before tying up the details at the second summit.
But Alexander Stubb, Finland's Europe minister, expressed his scepticism that leaders were doing enough to calm financial market players.
"Usually there is a crisis, then a meeting that ends after midnight, then a press conference where the solution is called historic and permanent, then the markets open and you notice the markets are not satisfied, and you start preparing the next meeting," Stubb told AFP in an interview.
As the focus switched from Greece to Italy's debt pile, under-fire Italian Prime Minister Silvio Berlusconi was called in for talks with EU President Herman Van Rompuy, Merkel and French President Nicolas Sarkozy shortly before the summit began.
"The idea is to pressure Berlusconi," a diplomat said amid fears Italy is being sucked down by the crisis, failing to take the tough action needed.
Other leaders ramped up the pressure for a firm European plan ahead of a key summit of the group of 20 leading industrial powers in Cannes on November 3-4.
British Prime Minister David Cameron said the crisis was having a "chilling effect" on the eurozone and further afield, while Greece's leader George Papandreou called for his colleagues to act "decisively and effectively."
Welcoming leaders as the meeting opened, Van Rompuy praised them for taking "unpopular" decisions to battle the crisis, adding: "I thank you for your political courage, often underestimated.
"But these steps forward also require plain hard work, so let's start."
In marathon talks Saturday, finance ministers thrashed out a plan that would boost bank reserves by around 108 billion euros ($150 billion) after agreeing that lenders should take greater losses on their Greek debt holdings.
The breakthrough led Merkel and Sarkozy to hail "progress" in fighting the crisis but Belgian Finance Minister Didier Reynders warned that the deal still had to be negotiated with the banking sector itself.
In a draft statement to be adopted later Sunday and obtained by AFP, leaders welcomed "progress ... on measures for the banking sector" and vowed to "finalise this work at its meeting of 26 October."
While some pieces of the complex crisis jigsaw were slotting into place, stubborn differences remained.
The major stumbling block is how to scale up the EU's 440-billion-euro war chest that leaders want available in the event that a big economy such as Italy or Spain is dragged into the debt mire.
The bailout fund would be rapidly depleted if either of Europe's third or fourth-largest economies needed help, so leaders are looking at ways to boost its effective lending capacity without actually adding cash -- unacceptable to EU paymaster Germany.
France backed away from a proposal to turn the fund into a bank that could borrow almost unlimited amounts from the European Central Bank under pressure from Berlin and the ECB itself, and two options were left under discussion.
One sees the fund being used to provide insurance to investors so that their losses would be covered in the event of a debt default. In this way, the package could exceed one trillion euros, which leaders hope would restore market confidence.
The other option would be to create a separate fund and entice international investors and institutions to match EU commitments, thereby increasing the amount of cash available for potential future bailouts.
However, agreement on this issue seemed to be far away, with Dutch Finance Minister Jan Kees De Jager saying that "big differences" still had to be ironed out.
The main reason for boosting the fund is to protect countries like Italy, amid concerns it could yet suffer a fate like Greece's.
Fellow Europeans want Italy to slash its staggering 1.9-trillion-euro debt, which amounts to 120 percent of gross domestic product.
The European Commission has also turned up the heat on Rome, calling on the government to unveil a raft of budgetary cuts "as a matter of urgency."