Hopes of euro deal diminish

Optimism drained from global stock markets yesterday after the German government lowered expectations that this weekend's summit of European leaders in Brussels will deliver a decisive breakthrough in solving the eurozone financial crisis.

Steffen Seibert, Angela Merkel's chief spokesman, said: "The Chancellor has pointed out that the dreams building up that this package will mean everything will be solved and over by Monday cannot be fulfilled." This message was reinforced by Ms Merkel's finance minister, Wolfgang Schäuble, who said: "We won't have a definitive solution this weekend".

Stock markets in Europe rose in the morning session, buoyed by a positive communiqué from the G20 summit of finance minister in Paris on Sunday indicating that eurozone leaders were putting the finishing touches to a "comprehensive plan" to restore market confidence. But they fell in the wake of the downbeat comments from Mr Schäuble and Ms Merkel's office.

One of the explanations for the German desire to calm expectations is that a great deal about the plan – in particular the scale of the writedown of Greece's debt – has yet to be agreed. Mr Schäuble made it clear at the weekend that the holders of Greek bonds must take a significantly larger "haircut" than the 21 per cent agreed in July. He said: "A lasting solution for Greece is not possible without a debt writedown, and this will likely have to be higher than that considered in the summer."

German policymakers have been pushing for writedowns of more than 50 per cent to ensure that Greece's private sector creditors share the pain of the bailout. But this attempt to re-open the July agreement has met resistance from banks in Germany and France which between them hold some €20bn (£17bn) of Greek debt.

The situation is complicated by the European Central Bank having accumulated holdings of around €45bn in Greek bonds as a result of itsefforts last year to stabilise the eurozone sovereign bond market. The ECB has repeatedly urged that any further reductions in the value of Greek bonds must be voluntarily agreed by creditors. The outgoing president of the ECB, Jean-Claude Trichet, said last week that governments "should avoid a compulsory solution".

Some analysts say that the ECB itself could be forced to register a loss and request a recapitalisation from eurozone governments if cuts are not voluntary. "As we understand it, the advantage for policymakers of keeping it 'voluntary' would be that the ECB and official creditors would not have to take a hit" said Holger Schmieding of Germany's Berenberg Bank.