BRUSSELS (Reuters) – Negotiations with Greece’s private creditors on a second rescue package for Athens have broken down, throwing efforts to resolve the euro zone debt crisis into doubt despite progress in boosting the region’s rescue fund to one trillion euros.

German sources said Chancellor Angela Merkel and French President Nicolas Sarkozy were now negotiating directly with representatives of the banking industry, on the sidelines of a euro zone summit, to try to forge a deal in which the banks will accept a writedown of at least 50 percent on their holdings of Greek government bonds.

The talks were expected to drag on deep into the night, with positions far apart on perhaps the most complex element of the three-part “comprehensive package” that the currency bloc is trying to pull together.

The three elements are so intertwined that euro zone leaders face an all-or-nothing showdown.

“They only started now on the hard core of the matter, which is the PSI (private sector involvement),” one EU source said.

The leaders earlier made progress on two other elements — bank recapitalization and moves to scale up the size of the euro zone’s 440 billion euro ($600 bln) bailout fund.

A draft statement from the summit, obtained by Reuters, outlined two options to leverage the fund designed to shore up heavily indebted states and thwart market attacks.

* Draft statement talks of leveraging bailout fund “several fold”

* Says details to be decided in November

* EU source says leaders looking to Greek debt writedown in excess of 50%

* Banks say no deal on Greek writedown

* Italy promises to raise pension age, provide economic action plan

By Luke Baker and Julien Toyer

BRUSSELS, Oct 27(Reuters) – Negotiations with Greece’s private creditors on a second rescue package for Athens have broken down, throwing efforts to resolve the euro zone debt crisis into doubt despite progress in boosting the region’s rescue fund to one trillion euros.

BRUSSELS (Reuters) – In a normal year, Europe’s heads of state might meet five or six times at most — at EU or G20 summits or other pow-wows of the powerful. Those that don’t get along don’t have to worry: they only have to make small talk for a few hours.

But the last two years haven’t been normal for the leaders of the European Union. The deepening sovereign debt crisis is threatening to tear their monetary union apart and the stresses and strains of dealing with it are clearly starting to show.

Since the beginning of 2010, when the crisis began, at least 17 summits and countless bilateral meetings have been held as they try to solve spiraling problems that have infected Greece, Ireland and Portugal and threaten Spain, Italy and potentially France, the region’s second largest economy.

Some of the gatherings have lasted for 20 hours or more, spread over two days, with the leaders closeted on the upper floors of the brown marble Justus Lipsius building in Brussels, locked in heated and sometimes angry debate.

Those that don’t get along can no longer hide it. The personality conflicts are bubbling to the surface, with diplomatic spats and disagreements growing ever more public, complicating efforts to resolve an already complex situation.

On Sunday, French President Nicolas Sarkozy and Britain’s David Cameron, who weeks ago flew to Libya together to declare victory in the campaign to overthrow Muammar Gaddafi, argued bitterly for more than an hour over the best way of combating the crisis, diplomats present during the discussion said.

At one point, one of the diplomats said, Cameron made fun of Sarkozy, saying that when they had gone to Libya, the microphones on a podium from where they spoke were barely above his waist — a dig at Sarkozy’s relatively short height.

BRUSSELS, Oct 26 (Reuters) – European Union governments will signal readiness to back banks with guarantees to avert a credit freeze but give no overall figure for recapitalising lenders, according to a draft statement from leaders meeting in Brussels on Wednesday evening.

The EU leaders will pledge to inject fresh capital into weak banks if necessary, but will first allow up to nine months to see if the banks can raise the money through private means, according to the draft summit conclusions obtained by Reuters.

The promise of guarantees underscores governments’ determination to head off a funding crunch that could threaten the region’s economy, but failure to sign off on an overall recapitalisation figure may undermine efforts to win back market confidence.

“Measures for restoring confidence in the banking sector are urgently needed,” the leaders say in the draft, which may yet change ahead of the meeting of heads of state and government.

“Guarantees on bank liabilities would be required to provide more direct support for banks in accessing term funding where appropriate,” said the draft statement.

“This is also an essential part of the strategy to limit deleveraging actions.”

The statement also said there was “broad agreement” on bolstering the capital ratio of banks to 9 percent after taking into account the market worth of their sovereign debt holdings, but it gave no overall figure for recapitalising EU banks.

BRUSSELS/ROME (Reuters) – The incoming head of the European Central Bank threw the euro zone a lifeline hours before a crucial summit on Wednesday by signaling the bank would go on buying troubled states’ bonds to combat market turmoil.

Mario Draghi delivered the message that financial markets have been waiting for about the ECB’s intentions as leaders of the 17-nation single currency area struggled to produce a comprehensive plan to resolve the bloc’s sovereign debt woes.

“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 Nov. 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 programme which prompted the resignation of the two most senior German ECB policymakers this year.

Prospects for a detailed masterplan to resolve the debt crisis at Wednesday evening’s euro zone summit looked dim, with disagreements remaining on some critical aspects, including how to give region’s bailout fund extra firepower.

EU officials and European diplomats lowered expectations of a breakthrough when leaders meet from 1730 GMT, despite Franco-German assurances that a “comprehensive solution” to two years of debt turmoil would be found.

BRUSSELS (Reuters) – Prospects for a comprehensive deal to resolve the euro zone debt crisis at a summit on Wednesday look dim, with deep disagreement remaining on critical aspects of the potential agreement, including how to give the region’s bailout fund greater firepower.

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

Whereas financial markets have been hoping for weeks that Wednesday’s summit, scheduled to start at 11:00 a.m. EDT with a gathering of all 27 EU leaders, followed at 1730 GMT by the meeting of the euro zone heads of state, will produce detailed figures on how to combat the debt crisis, there is now little likelihood of concrete numbers, sources say.

BRUSSELS (Reuters) – Prospects for a comprehensive deal to resolve the euro zone debt crisis at a summit on Wednesday look dim, with deep disagreement remaining on critical aspects of the potential agreement, including how to give the region’s bailout fund greater firepower.

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

Whereas financial markets have been hoping for weeks that Wednesday’s summit, scheduled to start at 11:00 a.m. EDT with a gathering of all 27 EU leaders, followed at 1730 GMT by the meeting of the euro zone heads of state, will produce detailed figures on how to combat the debt crisis, there is now little likelihood of concrete numbers, sources say.

BRUSSELS (Reuters) – The heads of state and government of the 17 euro zone countries will meet in Brussels on Sunday to discuss efforts to resolve the region’s debt problems.

The summit had been expected to come up with a comprehensive plan to tackle the crisis, but deep divisions between France and Germany over how best to strengthen the euro zone’s bailout fund led them to announce on Thursday that there would be no breakthroughs on Sunday and that another summit would have to be held next Wednesday to reach agreement.

Below is set out what looks likely to be decided on Sunday and what issues the leaders will have to return to on Wednesday as they attempt to get on top of a crisis that has raged for nearly two years and threatens the world economy.

BANK RECAPITALISATION

European Union officials told Reuters on Thursday all EU member states are now agreed that about 100 billion euros ($135 billion) is needed to strengthen European banks, protecting them against the threat of a Greek debt default and any wider contagion.

Private investors will be responsible for stumping up the funds first but if that proves insufficient, national governments will have to step in.

Only as a last resort will the bailout fund, known as the European Financial Stability Facility (EFSF), be used to provide funds to governments to help shore up the banks.

BRUSSELS (Reuters) – The heads of state and government of the 17 euro zone countries will meet in Brussels on Sunday to discuss efforts to resolve the region’s debt problems.

The summit had been expected to come up with a comprehensive plan to tackle the crisis, but deep divisions between France and Germany over how best to strengthen the euro zone’s bailout fund led them to announce on Thursday that there would be no breakthroughs on Sunday and that another summit would have to be held next Wednesday to reach agreement.

Below is set out what looks likely to be decided on Sunday and what issues the leaders will have to return to on Wednesday as they attempt to get on top of a crisis that has raged for nearly two years and threatens the world economy.

BANK RECAPITALISATION

European Union officials told Reuters on Thursday all EU member states are now agreed that about 100 billion euros ($135 billion) is needed to strengthen European banks, protecting them against the threat of a Greek debt default and any wider contagion.

Private investors will be responsible for stumping up the funds first but if that proves insufficient, national governments will have to step in.

Only as a last resort will the bailout fund, known as the European Financial Stability Facility (EFSF), be used to provide funds to governments to help shore up the banks.

BRUSSELS/BERLIN (Reuters) – France’s push to use more European Central Bank money to fight the euro zone debt crisis has run into strong resistance from Germany and other EU partners, leaving Paris increasingly isolated before a crucial summit.

The rift between Europe’s two biggest powers has already forced leaders to tack on an extra summit in the coming week. They will now meet twice — on Sunday and Wednesday — to try to adopt a comprehensive strategy to fight the crisis that began in Greece, spread to Ireland and Portugal and is now threatening to engulf bigger economies in the 17-nation currency area.

Senior European sources said Berlin and Paris were still at loggerheads on two core elements of a plan to build a firewall around Greece and stabilize bond markets — how to scale up the euro zone’s rescue fund and how to reduce Greek debt.

French President Nicolas Sarkozy appeared isolated after an acrimonious meeting in Frankfurt on Wednesday in seeking to turn the 440-billion-euro ($600 billion) EFSF rescue fund into a bank able to access ECB liquidity to fight contagion, and would have to back down, they said.

Germany, the ECB itself and the European Commission all argued that the move would violate an EU treaty prohibition on monetary financing of governments.

“The path is closed for using the ECB to ease liquidity problems,” German Chancellor Angela Merkel told her conservative parliamentary caucus in Berlin, according to participants at a closed-door meeting.

Finance Minister Wolfgang Schaeuble hammered home the same message on arrival for a preparatory meeting of euro zone finance ministers in Brussels, telling reporters: “We will stick to the situation as it is in the treaty that the central bank is not available for state financing.”