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German MPs back bailout fund boost

Chancellor Angela Merkel won the support of German lawmakers to increase the firepower of the eurozone's bailout fund today and indicated that private investors like banks should take losses of at least 50 per cent on their Greek debt holdings.

The leader of Europe's biggest economy headed to a high-stakes summit in Brussels with a strong mandate to seal a deal on Europe's increasingly unmanageable debt crisis after winning a parliamentary vote 503-89, with four abstentions.

Yet uncertainty remained over whether European leaders would be able to nail down a comprehensive plan to solve the debt crisis.

"The world is watching Europe and Germany; it is watching whether we are ready and able, in the hour of Europe's most serious crisis since the end of World War II, to take responsibility," Merkel told parliament before the vote.

"It would not be justifiable and responsible not to take the risk," she added. "I do not have a better alternative."

Europe has already bailed out three small eurozone members — Greece, Portugal and Ireland — but fears it cannot bail out the troubled economies of Italy and Spain, the third and fourth largest economies in the 17-nation currency bloc. It also knows that the first bailout for Greece was nowhere near big enough to keep the country from defaulting.

With that in mind, European officials are working on several plans at once — resolving Greece's debt situation, strengthening the continent's banks, which are expected to take deeper losses on their Greek bonds than they had planned, making sure other eurozone nations don't need bailouts and boosting the EU bailout fund itself.

"We have to take important decisions today," Luxembourg Prime Minister Jean-Claude Juncker, who also chairs the eurozone's finance minister meetings, said in Brussels. "But probably we will not be able to get all the smallest details in."

European Commission spokesman Olivier Bailly said it was too early to say whether there would be clear figures for writedowns on Greek debt or on the future firepower of the eurozone bailout fund, whose lending capacity is now at €440 billion.

German opposition leaders briefed by Merkel say changes would take the fund's lending capacity above €1 trillion, but that has yet to be finalized.

Another open question was whether Italy will be able to convince its partners that it can get its economy back on track in return for help.

"Our Italian friends know exactly that we have to insist that tonight they tell us that we get important structural consolidation measures in Italy," Juncker said. "That is a must."

French President Nicolas Sarkozy's spokeswoman Valerie Pecresse said the French leader commits "all his energy toward the success of this summit," aiming to forge a comprehensive solution to tackle the crisis.

One key issue in Brussels will be renegotiating a deal made in July under which Greece's private bondholders agreed to accept losses of 21 per cent on their holdings of government debt. That figure is now seen by EU governments as too little.

Merkel said the summit's aim must be a solution that allows Greece to cut its debt load to 120 percent of gross domestic product by 2020.

"That won't work without the private sector participating to a significantly higher extent" than was agreed in July, Merkel said.

She didn't spell out how much banks and other bondholders should contribute. But according to Greece's international creditors, a cut of 50 percent on the face value of Greek bonds now would take the country's debt to just above 120 per cent of GDP.

Slovakia's outgoing Prime Minister Iveta Radicova joined Merkel's call, saying as she left for Brussels that investors' "writedown has to be higher than 50 per cent."

A move to reduce the bonds' nominal value would significantly reduce the amount that Greece has to pay back when the bonds mature. It would go far beyond the tentative July deal, which focused only on lowering Greece's repayment rates and giving it more time to pay back its debt.

That would have reduced the financial pressure on Greece over the coming years, but would have done little to cut the country's overall debt load, which is set to spiral above an estimated 180 per cent of economic output next year.

A global banking lobby group negotiating on behalf of private investors, the Institute of International Finance, said it had made a "significant new offer" on "a voluntary basis" Tuesday in the talks with European governments. Spokesman Frank Vogl did not give further details, and European officials said negotiations were still ongoing.

Merkel insisted that cutting Greece's debts alone won't solve the country's economic problems.

"Painful and necessary structural reforms must be implemented," she said.

She added that a "permanent surveillance" of Greece would therefore be "desirable." Athens' financial reform efforts have been monitored every three months by inspectors from the EU, European Central Bank and International Monetary Fund since it received a bailout in May 2010. Greece has opposed calls for a permanent surveillance mechanism.

Merkel didn't mention Italy, where Premier Silvio Berlusconi averted a government collapse to clinch an overnight deal on emergency growth measures demanded by the EU.

Berlusconi and coalition partner Umberto Bossi reached a compromise on raising Italy's retirement age — a point of disagreement that had threatened Berlusconi's leadership.

Merkel stressed the need to make sure the crisis doesn't spread further, saying that recapitalizing troubled banks is necessary.

"Anyone who wants private creditors to participate in debt sustainability must also ensure that a screening off, a protection against the danger of contagion, is decided at the same time," Merkel told lawmakers. "Anything else is simply irresponsible."

The EU summit will consider plans to boost the €440 billion European Financial Stability Facility, or EFSF, by offering government bond buyers insurance against possible losses and attracting capital from private investors and sovereign wealth funds.

Germany, as the largest economy in the 17-nation eurozone, will be paying out a large share of the bailout money.

In her speech, Merkel stressed the EU must be prepared to overhaul its treaties to overcome the crisis for good and ensure a better functioning of the eurozone's 17 nations and the EU's 27 members.

A future treaty must allow that eurozone countries not living up to their fiscal and budgetary responsibilities under the bloc's growth and stability pact be taken to the European Court of Justice, she said.

Wednesday's joint resolution underlines the German parliament's expectations that, once the changes are implemented, the European Central Bank will no longer need to buy government bonds.

The ECB has bought about €97 billion in European government bonds August — a move that has caused concern in Germany.