Euro crisis rescue deal takes shape

German Chancellor Angela Merkel (C, R) and French President Nicolas Sarkozy (C, L) walk in a corridor on their way to a joint press conference at EU headquarters in Brussels. EU leaders on Sunday closed in on a broad agreement to resolve the euro crisis and pressed Italy to slash its debt mountain to reassure jittery world markets. (AFP Photo/Jean-Christophe Verhaegen)

After a gruelling session of talks, both French President Nicolas Sarkozy and IMF chief Christine Lagarde hailed "good progress" on talks to overcome the crisis that has threatened to pitch the world into a fresh recession.

However, leaders left Brussels with few concrete details, vowing to reveal all at a second summit on Wednesday despite mounting international and market pressure.

Sarkozy and German Chancellor Angela Merkel seemed to have resolved their differences, telling reporters at a packed joint news conference there was "a quite broad agreement" on the main sticking point, boosting the EU bailout fund.

Leaders are concerned the 440-billion-euro ($605-billion) war chest will be insufficient if it has to bail out a big country like Italy, so are examining ways to beef up its firepower without actually putting in more money.

EU president Herman Van Rompuy said there were two models still on the table.

One is a scheme whereby the fund would insure investors against potential losses on their bond holdings, a bid to tempt nervous traders back into buying the debt of shaky economies.

The other option would create a second fund to attract contributions from non-European nations such as China, although this has prompted splits within the EU.

By using such financial inventiveness, leaders hope to "leverage" the fund up to as much as a trillion euros, which they hope will be enough of what has become known as a "bazooka" to reassure volatile financial markets.

Van Rompuy told reporters: "It could even be that we combine the two models and have a cumulative effect."

European leaders also achieved breakthroughs on two related and complex issues, managing a huge write-down on the debt of stricken Greece and making sure banks had enough resources to withstand these losses.

Again, the summit produced no concrete figures in this area, but negotiations are underway with banks for them to take losses of at least 50 per cent on their holdings of Greek bonds.

In parallel, the EU wants banks to raise their core capital reserves to ensure these losses do not drag them into the mire. An estimated 107-108 billion euros would be required, diplomats said.

After hours of pressure on Italy to reduce its staggering 1.9-trillion-euro pile of debt, Prime Minister Silvio Berlusconi pledged firm action as he left the meeting.

"Tomorrow I will call a cabinet meeting because I wish to take advantage of this situation to see if we can advance measures I was unable to implement up until now due to differences within the majority," Berlusconi told reporters.

"Clearly, we are asking for a major effort on the part of the Italian authorities," Van Rompuy said.

Asked what would happen if countries failed to make the required efforts, he replied briefly and confidently: "They will make the commitments."

Merkel also urged "credible" cuts in Italy's debt as part of efforts to save the eurozone.

"Italy is a great economic force but Italy also has a very high level of debt and it must be reduced in a credible way over the coming years," she said.

"That's what we expect of Italy."

In a bid to prevent such a crisis happening again, leaders also pledged readiness to alter EU treaties to allow closer economic integration within the eurozone, and tougher sanctions for those that break the rules.

However, this prompted an angry response from the 10 countries outside the euro area, led by Britain's David Cameron, who warned the response to the crisis risked marginalising the rest of the EU.

"There is a danger ... that as this eurozone coming together happens, there is a risk that those countries outside the euro ... might see the eurozone members starting to take decisions that affect the single market."

He stressed that he had pushed for safeguards to be included in the final statement to prevent this happening as diplomats said a row over the text had delayed the end of the meeting.

The final statement insists on "a level playing field among all member states including those not participating in the euro."

Attention now turns to the meeting on Wednesday, amid fears the markets could go into meltdown if a "comprehensive package" is not clinched before a meeting of the G20 in Cannes on November 3-4.

"Work is in progress and progressing well," said a bullish president of the European Commission, Jose Manuel Barroso.

"We expect those decisions to be taken in 72 hours and I am confident those decisions will be taken."