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Work continues on European crisis plan

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BRUSSELS — Deliberations over a crisis plan for the euro zone continued across the continent Monday, with the Italian government struggling to prove its commitment to reform and a banking group warning of dire consequences if private losses on Greek bonds grow too steep.

The euro region’s financial technocrats, meanwhile, worked to flesh out the details of what has become a complex effort to address three issues at once: a new financing plan for Greece that will include deep losses for private investors who have lent money to the country; a regionwide effort for banks to increase their financial strength to absorb Greek and other potential losses; and a scheme to increase the effective size of a regional bailout fund.

The process remains something of a high-wire act with the warning that Greece could face economic isolation if European officials insist on the 60 percent losses envisioned for Greek bondholders. European officials say losses of that magnitude are needed to stabilize Greece’s decaying finances, but they want banks and other investors to accept them voluntarily.

Charles Dallara, managing director for the Institute of International Finance and the lead negotiator for the private sector, said in a statement that the European demand risks crossing the line of what could be considered “voluntary.”

“There are limits,” Dallara said. “Any approach that is not based on cooperative discussions and involves unilateral actions would be tantamount to default, would isolate the Greek economy from international capital markets for many years. . . . It would also likely have severe contagion effects, which would cost the European and world economy dearly.”

The political dynamics remained complex as well.

Although Britain does not use the euro, British officials have been outspoken about the need for their neighbors to act, saying turbulence in the euro region has cast a pall on their economy. By the summit’s end, the British commentary earned a rebuke from French President Nicolas Sarkozy, who, according to reports in the British media, told Prime Minister David Cameron he should keep his opinions to himself.

Italian Prime Minister Silvio Berlusconi, meanwhile, was sent home to Rome under a virtual edict to speed plans to reform Italian labor markets, trim the country’s generous pension system and make other changes to rein in the country’s massive debts.

The Italian leader called his cabinet into session Monday evening to discuss a response that European officials said they expect by Wednesday’s follow-up meeting.

The Sunday summit produced what officials described as broad agreement, but they delayed final approval until Wednesday, when they expect to ratify a more detailed program.

With so many interconnected issues, officials “for the first time are addressing these in parallel,” European Commission spokesman Amadeu Altafaj-Tardio said a day after the sometimes temper-raising summit.

Operating under a deadline imposed after intense pressure from the United States, China and others, the summit reached some important breakthroughs.

French officials speaking in Paris on Monday said they had given up on their hope to have the European Central Bank become more deeply involved in supporting the new bailout fund, the European Financial Stability Facility. With that concession in hand, German lawmakers — who are opposed to any deep European Central Bank role in financing Italy, Greece or other nations — said they would give Chancellor Angela Merkel authority to approve other options at the Wednesday meeting.

At present, the bailout fund is backed by finite guarantees from the euro-zone nations that give it authority to raise and lend about $600 billion to support weakened governments or banks.

About a third of that money is already committed to bailout programs in Greece, Ireland and Portugal. The balance is not considered adequate to support Spain and Italy if they run into further trouble.

To amplify the fund’s impact, officials are debating two options.

One would use the EFSF bailout fund as a sort of insurance pool that would absorb the first 20 percent of any losses suffered by new investors in the bonds of Italy or other stressed countries. The available funds could insure a trillion dollars or more of bonds. By limiting the potential losses faced by investors, proponents of the idea think it would also lower the interest rates that investors would otherwise demand of those countries.

A second idea would create a special investment fund that would channel outside money — from China, Middle East sovereign wealth funds or other sources — into European bond markets. The structure of the investment vehicle and its connection to the bailout fund are still being discussed, officials said.

Special correspondent Karla Adam contributed to this report.

More coverage on the European debt crisis:

Greek rescue may cost banks even more

Is Dexia the canary in the coal mine?

Papandreou calls for unity in Greece

Italy’s leader caught between E.U. demands and allies’ reluctance on pension reform

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