Merkel, Sarkozy maintain crisis cure in sight

Chancellor Angela Merkel and President Nicolas Sarkozy both cited "progress" before knuckling down to the biggest sticking point on the eve of an EU summit where Italy comes under intense pressure to lift much of the burden.

Negotiations in Brussels "will be difficult," Merkel said of a Sunday target to shape "definitive decisions" come a second summit called for midweek.

"This is why it is important for France and Germany to be active," she added, as officials in Brussels and national capitals worked tireless to seal a deal.

Since early Friday, senior ministers from around the European Union have worked to break down the barriers to a solution that markets can buy: it was almost midnight (2200 GMT) on Saturday when Europe's power couple ended a flurry of preparatory talks.

Nothing immediately filtered out from the talks also involving International Monetary Fund managing director Christine Lagarde, EU president Herman Van Rompuy and EU executive chief Jose Manuel Barroso.

"These meetings are absolutely crucial," Sarkozy said of carefully choreographed moves to chop Greece's debts in half or more, plug consequent holes in bank balance sheets and ramp up broader eurozone rescue funding firepower.

"We must resolve this financial crisis," he added, saying there was "no other choice" but to agree an "ambitious solution."

Greece will get a new bailout once negotiations conclude with banks told to face facts and write off "at least 50 per cent" of their bond holdings, diplomats say.

In exchange for "voluntary" agreement -- so as not to trigger default insurance contracts -- Greece would get new rescue loans from eurozone and EU partners, plus the IMF.

That followed a decision on Friday to release 8.0 billion euros ($11 billion) in blocked loans next month.

The cost to European governments of the second rescue package will be a bit higher than originally thought, with Athens enduring a brutal recession.

Banks meanwhile can also now count on governments to fill a $150-billion hole in their reserves, with "107-108 billion euros" required to bring lenders up to newly raised standards, officials also revealed.

Italy, Spain and Portugal each had to be separately convinced by officials of the European Banking Authority and the European Central Bank (ECB), another diplomat said.

Many Italian and Spanish banks, like the French, have seen their credit rating downgraded in recent weeks as fears rise over their exposure to sovereign debt.

Belgium's Finance Minister Didier Reynders said the nitty-gritty of negotiations with the banks had still to conclude.

Nevertheless, these two pieces of the political puzzle fell into place amid dire warnings that Europe's difficulties in overcoming the crisis would provoke a global recession.

The biggest challenge, somehow giving the 440-billion-euro European Financial Stability Facility (EFSF) a reach several times greater, remains at the core of Sunday's talks, alongside demands for Italy to cut its coat according to its cloth like never before.

Greek Prime Minister George Papandreou said differences here had to be resolved in the coming days "not only for the future of Europe but for the existence of Europe."

A damaging row pitting Paris against Berlin slipped from view slightly when French proposals for the EFSF to tap into unlimited ECB funds were dropped, Dutch Finance Minister Jan Kees De Jager said.

Poland's finance minister Jacek Rostowski said one way or another Europe would need to agree on "the creation of a large and credible firewall in terms of preventing contagion spreading from one sovereign to another."

Diplomats said two complementary scenarios are under examination: using the EFSF to insure partial losses on future eurozone bonds, and proposals to create a special 'fund within a fund' that would entice emerging economies to support stressed eurozone economies.

The idea is that if Europe must bring costly solutions to a G20 summit at the start of November to save the world economy, emerging nations should also do their bit.

As a key member of the inner G7 alongside the United States and Japan, British finance minister George Osborne said London would be "keeping up the pressure over the next couple of days" to craft a lasting, overall solution to the crisis.

Italian Prime Minister Silvio Berlusconi held face-to-face talks with Merkel overnight and is to have another head-to-head with Sarkozy on an unrelated row over personnel changes at the ECB.

Spain too is under close watch by partners, but the European Commission says Italy must present a new national financial plan "as a matter of urgency."

Germany particularly wants Italy to slash its 1.9-trillion-euro debts.

A participant in the evening talks among conservative rivals, who had to remain anonymous, said Berlusconi was "very reluctant" to discuss with Merkel the need to implement extra measures.