By Luke Baker and James Mackenzie
A draft statement from an emergency summit Wednesday, obtained by Reuters, said two options were being considered to leverage the 440 billion euro ($600 billion) fund designed to shore up heavily indebted states and thwart market attacks.
If the draft is adopted with little change, the second euro zone summit in four days will have sketched broad intentions but failed to produce a detailed masterplan to scale up the fund, recapitalize banks and reduce Greek debt to a sustainable level, despite Franco-German assurances a "comprehensive solution" would be found.
One proposal 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 other method for scaling up the European Financial Stability Facility involves using it to offer partial guarantees to purchasers of new euro zone debt. The two options could be used simultaneously and the International Monetary Fund could also help.
Euro zone finance ministers will be asked to finalize the terms and conditions in November, the statement said. An EU source said the EFSF was expected to be leveraged by something like a factor of four giving it scope of around 1 trillion euros.
"It's moving in the right direction but it is going to disappoint the market, particularly given the emphasis policy makers put on this meeting," said Jessica Hoversen, foreign exchange analyst at MF Global in New York.
Aside from the EFSF, specifics of a Greek debt write-down may also be left for later negotiation among finance ministers.
While there is consensus on the need for European banks to raise around 110 billion euros ($150 billion) in extra capital to withstand a potential Greek debt default and wider financial contagion, governments and banks are still haggling over the scale of write-offs private bondholders will have to take on their Greek debt holdings, sources said.
"There will be give and take with the banks until the last minute," a Greek government source involved in the Brussels negotiations said. "As far as now, the talks are going on."
European leaders' pattern of responding too little, too late has spawned a wider economic and political crisis that threatens to undermine the euro single currency and the European Union project.
"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 program which prompted the resignation of the two most senior German ECB policymakers this year.
It also 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.
German Chancellor Angela Merkel won a parliamentary vote of support for strengthening the rescue fund 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.
Jean-Claude Juncker, the chairman of euro zone finance ministers, forecast an eventual deal on a 50 percent write-off.
Also weighing on the summit was deep concern about Italy, which is now in the bond market firing line.
Under huge pressure from its euro zone partners, Rome promised a package of reform steps to boost growth and control its public debt, including labor and pensions reforms and additional revenues from property divestments.
In a letter sent to the summit in Brussels, the government said it would produce a plan of action to boost growth by November 15, promising to raise the retirement age to 67, cut red tape and modernize state administration to improve conditions for business and raise 5 billion euros a year from divestments and improved returns from state property.
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.
Italy has the euro zone's largest sovereign bond market, with a public debt of 1.8 trillion euros, 120 percent of GDP. If it went the same way as Greece, Ireland and Portugal, the rescue fund does not have enough money to bail Rome out.
(Additional reporting by Julien Toyer, Jan Strupczewski and John O'Donnell in Brussels, Annika Breidthardt and Sarah Marsh in Berlin, Daniel Flynn and Harry Papachristou in Athens, Barry Moody in Rome; Writing by Luke Baker and Mike Peacock; editing by Janet McBride)