Sarkozy yields on ECB crisis role, pressure on Italy

Sun Oct 23, 2011 5:47pm EDT
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By Julien Toyer and Andreas Rinke

BRUSSELS (Reuters) - European Union leaders made some progress toward a strategy to fight the euro zone's sovereign debt crisis on Sunday, nearing agreement on bank recapitalization and on how to leverage their rescue fund to try to stop bond market contagion.

But final decisions were deferred until a second summit on Wednesday and sharp differences remain over the size of losses private holders of Greek government bonds will have to accept.

French President Nicolas Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited European Central Bank funds to fight the crisis. Instead, the euro zone may turn to emerging economies such as China and Brazil for help in underpinning its sickly bond market.

"Further work is still needed and that is why we will take the decisions in the follow-up euro zone summit," European Council President Herman Van Rompuy said after chairing 12 hours of talks.

He indicated that Italy, the euro zone state now in the markets' firing line, had been told to come up with a more convincing plan this week to implement structural economic reforms to raise its growth potential.

"Between now and Wednesday, some members of the European Council will have to convince colleagues that their country is implementing the promised measures fully," Van Rompuy said.

Italian Prime Minister Silvio Berlusconi said he expected to call a cabinet meeting on Monday to discuss measures to boost growth, as Italy came under mounting pressure from European partners to step up reforms to restore market confidence.

Sarkozy acknowledged that France's proposal to multiply the firepower of the euro zone's rescue fund by turning it into a bank and letting it borrow from the ECB would not fly for now because neither Germany nor the central bank accepted it.   Continued...

<p>(L to R) European Commission President Jose Manuel Barroso (L), Germany's Chancellor Angela Merkel (C) and European Central Bank President Jean-Claude Trichet (R) attend a euro zone summit in Brussels October 23, 2011. REUTERS/Yves Herman</p>