By Luke Baker
EU officials and European diplomats are lowering expectations of a breakthrough when the 17 euro zone leaders meet, despite Franco-German assurances only weeks ago that a "comprehensive solution" to more than two years of debt and economic turmoil would be found by the end of the month.
While there appears to be broad consensus on the need for around 110 billion euros ($150 billion) to be injected into the European banking system to help it withstand a potential Greek debt default and wider financial contagion, there is little clarity on either of the other two critical parts of the plan.
One element involves scaling up the region's 440 billion euro bailout fund, known as the European Financial Stability Facility, and the other is focused on reducing Greece's debt burden by deepening the losses private investors -- major banks and insurance companies -- must take on their Greek bonds.
EU leaders will consider two methods for scaling up the EFSF, one by using it to offer guarantees to purchasers of new euro zone debt, and the other using part of its capacity to set up a special purpose investment vehicle that would attract money from sovereign wealth funds and other investors to buy debt. They might also agree to combine both options.
NO CONCRETE NUMBERS EXPECTED
"The numbers are not yet finalized -- you have to have all parameters in place and see what is needed and what the leverage factor would be. It needs a lot of technical work to come up with a number," one EU official said, adding that discussions would continue on Wednesday to forge a pre-summit consensus.
"The leaders will agree on the options tomorrow, but whether it will be an agreement with all details remains to be seen. I think it will be challenging -- it will be very difficult to agree on everything."
Instead, it looks likely that it won't be until November 7-8, when EU and eurozone finance ministers are next scheduled to meet, that the details of whatever euro zone leaders agree on during Wednesday's summit will be completely finalized.
Financial markets are likely to find that extremely disappointing, having been told on multiple occasions by EU leaders that a resolution to the crisis was near, only to find the EU and its institutions unable to deliver.
That has in turn morphed a banking and debt crisis into a wider economic and political crisis that threatens to undermine the euro single currency and the European Union project.
Further complicating Wednesday's talks -- which will be preceded by a meeting of the Eurogroup Working Group, an elite collection of senior finance officials and central bankers who will have a last attempt to hammer out a meaningful agreement -- is intense market pressure on Italy and a dispute in Germany.
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.
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 programs.
The problem is, there is not enough money to bail out Italy.
ECB ROLE IN DISPUTE
There is also 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, with France wanting deep and direct ECB involvement and Germany staunchly against it.
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 go on buying troubled states' bonds -- a key backstop against deeper turmoil.
Many analysts believe the ECB is the only authority at this stage that can deliver the financial firepower that convinces nervous and skeptical markets that the crisis can be contained. Locking the ECB out could prove another negative therefore.
At the same time there is intense disagreement about how to make Greece's debt situation sustainable.
Euro zone governments are demanding that the private sector accept a 60 percent "haircut" as part of a second rescue package to make Athens' debt mountain, set to reach 160 percent of economic output this year, more sustainable.
Bank negotiators have offered a 40 percent write-down and warned that forcing them into deeper losses would amount to a forced default, with what banks say will be devastating consequences for the European financial system.
EU diplomats said the outcome was uncertain, but some forecast a last-minute deal on a 50 percent write-down -- an outcome backed by Jean-Claude Juncker, the chairman of euro zone finance ministers.
Greek Prime Minister George Papandreou said: "I hope that tomorrow we will come to decisions, this is our partners' will.
"Tomorrow we want to put an end, turn a page, in order for the country to move forward."
They were hopeful words, but the prospect looks slight. (Additional reporting by Jan Strupczewski in Brussels and Catherine Bosley in Zurich; Editing by Kevin Liffey)