Europe bids to ease Italy debt worries

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Europe rushed to ease worries Italy could become the next Greece, needing a bailout, as negotiators battled to complete a deal with banks on a big debt write-off for Athens.

As Germany readied for a parliamentary vote on an overall response to the eurozone debt crisis ahead of Wednesday's second emergency EU summit, the European Union mulled a plan for its bailout fund to buy Italian government bonds.

With Italian bond yields still hovering near the six-percent level that triggered large-scale intervention by the European Central Bank in August, a top EU official said it might be "time to put the plan to Italy."

Europe wants Rome to deliver "measures to show there is no risk of Italy becoming another Greece one day," another senior source said on condition of anonymity.

Eurozone aid comes with strings attached and Italian Prime Minister Silvio Berlusconi's government spent Monday scrambling to agree new budget cuts and reforms before the second summit in four days.

"No-one has anything to fear" over Italy's debt, Berlusconi said in a statement, adding that there was no need for a lecture from the country's partners.

"No-one is in a position to teach lessons to their partners," he said, despite the focus on Italy's 1.9 trillion euro debt mountain.

Berlusconi called an emergency cabinet meeting Monday evening but it adjourned with no annoucements made due to differences over pension reforms, an AFP journalist in Rome reported.

In Brussels, an official said the plan to use the European Financial Stability Facility, the rescue fund set up after the May 2010 first Greek debt bailout, is seen as necessary to assuage markets.

But it "will lead to a certain amount of European surveillance of Italy's budget," he said.

A "program-lite" for Italy, another official described it as, in reference to the technical term used for EU bailouts.

Trying to hold the line on borrowing rates, the European Central Bank (ECB) revealed a 4.5-billion-euro ($6.2 billion) splurge last week on eurozone bonds, without saying which ones it bought.

The ECB is the guardian of the eurozone as a whole and, despite some reluctance, it has now bought a total 169.5 billion euros in eurozone government bonds since early last year in an effort to ease debt tensions.

Wednesday's summit is the self-appointed deadline for Europe to agree and ratify -- in advance, in the case of the German parliament -- a strategy for fighting contagion on financial markets amid mounting signs the bloc is falling back into recessionary times.

Its leaders also have to face critics, led by US President Barack Obama, at a G20 summit in Cannes, France, on November 3 and 4, and Italy -- the eurozone's third biggest economy -- lies at the core of global concern.

Obama has warned that the nearly two-year euro debt crisis is "scaring" a world seeing growing protests from Athens to Wall Street.

The big sticking-point they need to resolve on Wednesday is how to ramp up the EFSF's firepower, via a combination of fancy financial footwork.

It is underpinned by 440 billion euros of eurozone government guarantees -- nearly half supplied by Germany -- but a huge amount has already been committed to bailouts of Ireland and Portugal, even before a second Greek bailout was agreed in July with a big debt write-off of 21 percent.

Leaders are looking to use some of the remaining firepower to insure bond buyers against potential future losses, so attracting buyers and maintaining interest rates at manageable levels.

They also want to entice the likes of China, as well as private investors the world over, to contribute top-up funding.

Japanese Finance Minister Jun Azumi on Tuesday said Europe was close to a resolution of its debt crisis and urged the continent's leaders to close the deal for the sake of the global economy.

"The European issue is in its final stage. Focus is on whether (Europe) can construct a scheme that could offer a sense of relief to the world," Azumi told reporters. "We want them to firmly get that done."

Fundamental to wide-ranging talks with international finance houses, negotiators were "relatively close" to a deal to write-off around half of all privately-held Greek debt, the EU said.

But the bank lobby, the Institute of International Finance, said there were limits to what could be considered a voluntary write-off, warning against actions leading to a default that would "isolate the Greek economy from international capital markets for many years."

Greece's total debts are around 350 billion euros, not all of which would be covered by the so-called debt "˜haircut.'

The EU asked banks to take a 60-percent cut but banks held to a 40-percent offer, sources said -- with the EU optimistic of a deal "somewhere in the middle."

However, leaders have also yet to endorse finance ministers' conclusions that banks will need a near-110-billion-euro recapitalization to enable them to cope with the fallout from any Greek debt restructuring.

Analysts such as ING Belgium economist Carsten Brzeski bemoaned that Sunday produced "no new fact, no new conclusion" as leaders sought a concrete advance to take into Wednesday's summit.

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