Europe: Grimmer by the minute
@CNNMoney October 25, 2011: 9:50 AM ET 
European Union officials, including French President Nicolas Sarkozy and German Chancellor Angela Merkel, posed for a 'family photo' amid crisis talks in Brussels.
But the details are foggy and last-minute delays suggest that significant disagreements remain unresolved.
On Wednesday, government heads from all 27 members of the European Union will gather for a second time, following a summit over the weekend that failed to produce a definitive accord.
EU politicians have promised to deliver an ambitious and durable solution to a crisis that poses the biggest threat to the euro since the common currency was launched over a decade ago.
"The sovereign debt crisis threatens the very existence of the eurozone," said Howard Archer, chief European economist at IHS Global. "It is therefore absolutely imperative that European policymakers finally deliver a major package of measures at the conclusion of their summit on Wednesday."
The latest talks have focused on a trio of interconnected challenges: restructuring the Greek government's crushing debt load, strengthening European banks and boosting the effectiveness of a limited rescue fund.
While the stakes are exceedingly high, expectations for bold and swift action are dim. It took three months for comparatively modest crisis measures announced in July to be approved by all 17 euro area governments.
Some experts have already dismissed Wednesday's meeting as a prelude to the Group of 20 summit in early November, when the world's most powerful leaders will gather in Cannes, France, to discuss economic affairs, among other things.
"We have no confidence at all that the various proposed strategies will provide any effective fix for Europe's ills," said Ian Gordon, an analyst at investment bank Evolution Securities in London.
Calls have been growing for private sector banks and investors to voluntarily accept larger writedowns, or haircuts, on the value of Greek government bonds.
Under a July agreement, bondholders had agreed to a 21% reduction on the face-value of Greek debt. But the latest estimates suggest that writedowns of 50% or more will be necessary.
It won't be easy.
Analysts say talks with the Institute of International Finance, which represents the interests of banks that hold Greek debt, have been challenging.
Analysts said the writedowns must be voluntary because an involuntary haircut could trigger credit default swaps, which act as insurance policies on bonds.
The fear is that reducing the amount of money Greece owes will prompt other debt-burdened nations to seek a similar deal. But economists say there is no way for Greece to get out of debt without some concessions from creditors.
The big question: where will the money come from?
But market participants are skittish about investing in European banks because of worries over sovereign debt exposure. In addition, some banks have been shut out of the wholesale funding market and have been relying on temporary liquidity measures from the ECB.
Banks that cannot raise money in capital markets should be recapitalized by member state governments, politicians say.
However, increasing the amount of money the EFSF controls has been ruled out by EU nations.
There has been talk of combining the EFSF, which will be phased out in 2013, with a planned replacement called the European Financial Stability Mechanism.
Leaders are also considering a Special Purpose Vehicle to attract private capital from sources, such as emerging market sovereign wealth funds. The IMF may also contribute more money via an SPV, analysts say.
But the talks have so far mainly revolved around ways to enhance or "leverage" the existing EFSF to get more miles out of its relatively limited resources.
The fund has already committed loans to Ireland and Portugal. It is also expected to back a second bailout for Greece, originally expected to total €109 billion.
It also has the power to buy bonds directly from investors in the secondary market. The EFSF is seen as a potential replacement for the ECB as the buyer of last resort for the debt of nations such as Italy and Spain, which are struggling to secure affordable funding.
There have been several theories about how to boost the fund's firepower but analysts say a bond insurance scheme is the most likely outcome.
The plan is to use what money the fund has left after all of its other commitments to provide a partial guarantee on newly issued government bonds. The goal is to jumpstart the market for sovereign debt by giving investors some confidence that they won't lose all of their money.
The need for a large and credible rescue fund is urgent as worries about Italy grow.
Italy, the eurozone's third largest economy, has one of the largest bond markets in the world, worth an estimated €2 trillion.
While Italy is in much better fiscal shape than Greece, the Italian economy has been ailing for years and the nation has debts equal to about 150% of its economic output.
That's a recipe for disaster unless the government can force through more austerity and manage to boost economic growth at the same time.
European Union officials, including French President Nicolas Sarkozy and German Chancellor Angela Merkel, posed for a 'family photo' amid crisis talks in Brussels.NEW YORK (CNNMoney) -- European leaders insist they are making progress on a comprehensive plan to tackle the eurozone's debt and banking crisis.
But the details are foggy and last-minute delays suggest that significant disagreements remain unresolved.
EU politicians have promised to deliver an ambitious and durable solution to a crisis that poses the biggest threat to the euro since the common currency was launched over a decade ago.
"The sovereign debt crisis threatens the very existence of the eurozone," said Howard Archer, chief European economist at IHS Global. "It is therefore absolutely imperative that European policymakers finally deliver a major package of measures at the conclusion of their summit on Wednesday."
The latest talks have focused on a trio of interconnected challenges: restructuring the Greek government's crushing debt load, strengthening European banks and boosting the effectiveness of a limited rescue fund.
While the stakes are exceedingly high, expectations for bold and swift action are dim. It took three months for comparatively modest crisis measures announced in July to be approved by all 17 euro area governments.
Some experts have already dismissed Wednesday's meeting as a prelude to the Group of 20 summit in early November, when the world's most powerful leaders will gather in Cannes, France, to discuss economic affairs, among other things.
"We have no confidence at all that the various proposed strategies will provide any effective fix for Europe's ills," said Ian Gordon, an analyst at investment bank Evolution Securities in London.
Greece
The main issue for Greece is the role the private sector could play in restructuring Greece's debt.Calls have been growing for private sector banks and investors to voluntarily accept larger writedowns, or haircuts, on the value of Greek government bonds.
Under a July agreement, bondholders had agreed to a 21% reduction on the face-value of Greek debt. But the latest estimates suggest that writedowns of 50% or more will be necessary.
It won't be easy.
Analysts say talks with the Institute of International Finance, which represents the interests of banks that hold Greek debt, have been challenging.
Greece: This cannot end well
IIF president Charles Dallara said in a statement that the institute and EU officials continue to "explore options" for Greece. But he added that "there are limits" to what the private sector will tolerate as voluntarily, warning that any "unilateral actions would be tantamount to default."Analysts said the writedowns must be voluntary because an involuntary haircut could trigger credit default swaps, which act as insurance policies on bonds.
The fear is that reducing the amount of money Greece owes will prompt other debt-burdened nations to seek a similar deal. But economists say there is no way for Greece to get out of debt without some concessions from creditors.
Banks
European banks need to raise capital reserves in order to withstand a default by Greece or another euro area government. The tab could total as much as €200 billion.The big question: where will the money come from?
Europe bank rescue is not enough
EU politicians, including German Chancellor Angela Merkel and French President Nicolas Sarkozy, have said banks should first try to raise capital from private investors before seeking government aid.But market participants are skittish about investing in European banks because of worries over sovereign debt exposure. In addition, some banks have been shut out of the wholesale funding market and have been relying on temporary liquidity measures from the ECB.
Banks that cannot raise money in capital markets should be recapitalized by member state governments, politicians say.
Bailout fund
The European Financial Stability Facility, a €440 billion fund that was recently empowered to intervene in sovereign debt markets and lend money to governments that need to boost bank capital, is widely seen as inadequate.However, increasing the amount of money the EFSF controls has been ruled out by EU nations.
There has been talk of combining the EFSF, which will be phased out in 2013, with a planned replacement called the European Financial Stability Mechanism.
Leaders are also considering a Special Purpose Vehicle to attract private capital from sources, such as emerging market sovereign wealth funds. The IMF may also contribute more money via an SPV, analysts say.
But the talks have so far mainly revolved around ways to enhance or "leverage" the existing EFSF to get more miles out of its relatively limited resources.
The fund has already committed loans to Ireland and Portugal. It is also expected to back a second bailout for Greece, originally expected to total €109 billion.
Moody's to France: We're watching you
In addition to providing loans, the fund has been authorized to lend money to governments that need to inject capital into banks.It also has the power to buy bonds directly from investors in the secondary market. The EFSF is seen as a potential replacement for the ECB as the buyer of last resort for the debt of nations such as Italy and Spain, which are struggling to secure affordable funding.
There have been several theories about how to boost the fund's firepower but analysts say a bond insurance scheme is the most likely outcome.
The plan is to use what money the fund has left after all of its other commitments to provide a partial guarantee on newly issued government bonds. The goal is to jumpstart the market for sovereign debt by giving investors some confidence that they won't lose all of their money.
The need for a large and credible rescue fund is urgent as worries about Italy grow.
Italy, the eurozone's third largest economy, has one of the largest bond markets in the world, worth an estimated €2 trillion.
While Italy is in much better fiscal shape than Greece, the Italian economy has been ailing for years and the nation has debts equal to about 150% of its economic output.
That's a recipe for disaster unless the government can force through more austerity and manage to boost economic growth at the same time.
