By Jack Duffy

PARIS (MNI) – European leaders are set to deliver a package of
measures to battle the Eurozone debt crisis at their Brussels summit on
Sunday, but it is unlikely to be as decisive or comprehensive as some
officials from the single-currency bloc have claimed.

Analysts speculating on the possible outcomes of the summit said
the results are likely to be more in line with the German view of “one
step on a long road” than the French view that the very future of the
euro is at stake in decisions made on October 23.

“There is no silver bullet to solve this crisis,” said Nicholas
Spiro, managing director of Spiro Sovereign Strategy, a London-based
consulting firm. “The divisions in the Eurozone are too deep to be
solved in matter of days.”

Rather than a detailed plan, European leaders are more likely to
offer a roadmap out of the crisis, in which the paths to a stronger
European banking system, a more realistic Greek debt restructuring, a
beefed up European bailout fund and stricter economic governance are
clearly etched.

As such, financial markets seeking specifics on how many billions
will be pumped into European banks and whether the firepower of the
European Financial Stability Facility will be increased to E1 trillion
or E2 trillion are likely to be disappointed.

“I think after Sunday we will still be searching for the bazooka,”
said Carsten Brzeski, a senior economist at Ing Group in Brussels. “This
could cause the most market disappointment.”

Brzeski said the bank recapitalization plan will probably include a
new Tier 1 capital ratio, possibly 9%, and a timetable for banks to
raise the additional funds. A “headline” figure detailing the total
amount of the recapitalization is unlikely, he said.

On Greek debt, the size of the “haircut” that banks will have to
take on their Greek government bond holdings is likely to rise from the
21% agreed at the July Brussels summit to 40%, Brzeski said. “This is
not enough to put Greek debt on a sustainable path, but any more would
be hard for banks to sustain,” he said.

The European Financial Stability Fund, Europe’s bailout fund, will
be the most difficult element of the package, not only due to
differences on how the fund should be leveraged, but because France and
Germany differ on how the fund’s money should be used. French President
Nicolas Sarkozy wants the fund to have unlimited powers to intervene in
secondary markets. German Chancellor Angela Merkel wants limits. Sarkozy
wants EFSF funds to be available to recapitalize banks. Merkel wants
national funds to be used.

As for increasing the size of the size of the fund, recent reports
suggest EU officials are leaning toward a plan to use the EFSF as a bond
insurer, to guarantee first losses on newly-issued debt by some member
states. Analysts say the plan would allow the EFSF to guaranty more than
E1 trillion of debt, but also carries the risk of generating contagion
as investors move from non-insured to insured bonds.

“There will be a leveraged EFSF, probably using the insurance
solution, which is the worst possible solution,” said Guntram B. Wolff,
deputy director of Bruegel, a Brussels-based think tank. “It would
create a two-tired bond market, and ultimately force the European
Central Bank to step in to support the part that was not protected.”

Wolff said the insurance plan was only being considered because the
ECB has ruled out its participation in leveraging the fund, and any move
to increase the contributions of EU member states would jeopardize
France’s ‘AAA’ credit rating.

The fourth and final part of the plan, analysts say, will be a
statement by EU leaders committing to greater economic governance and
tighter surveillance of member countries so that a Greek crisis can
never happen again. The leaders are likely also to call for treaty
changes that would allow for greater fiscal integration, which analysts
say could be the first step toward the issuance of a Eurobond.

“At this summit we may see the contours emerge of a German-imposed
strategy to go down the route of greater fiscal concentration,” Spiro,
the London based consultant, said. “But it won’t happen quickly. I will
be a protracted process that moves in fits and starts. It’s certainly
not something that can be accomplished at a single summit.” he said.

–Paris newsroom, +331-42-71-55-40; jduffy@marketnews.com

** Market News International Paris Bureau **

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