European Union talks with banks on bondholder losses as part ofa second Greek bailout ran aground, an EU official said, dimmingthe chances for a comprehensive crisis-fighting strategy attonight's summit.

German Chancellor Angela Merkel and French President NicolasSarkozy, leaders of Europe's two biggest economies, may step out ofthe leaders-only summit to meet bankers in an effort to break thedeadlock, a person familiar with the discussions said.

“Work's not been done yet, but everyone's coming here today withthe goal to progress quite a bit,” Merkel told reporters as shearrived for the Brussels summit.

The Greek stalemate darkens the summit's prospects, since a dealstruck today on recapitalizing banks and later talks on bolsteringthe 440 billion-euro ($608 billion) rescue fund hinge on steeringdebt-laden Greece toward financial health.

While policy makers and bondholders were converging on a 50percent writedown of Greek debt, clashes over collateral tounderpin the transaction will limit the summit to issuing a mandatefor further talks, the EU official said in Brussels today oncondition of anonymity.

European leaders convened for the second summit in four days —and the 14th in 21 months — amid mounting global exasperation overtheir failure to extinguish the two-year-old crisis that nowthreatens to ravage Italy and France and brake the worldeconomy.

Stocks Gain

U.S. stocks gained and the euro erased declines on hopes forprogress. The Standard & Poor's 500 Index added 0.9 percent at3 p.m. in New York. The euro was little changed at $1.3906.

The outlines of a deal to safeguard banks emerged, centering ona June 30, 2012 deadline for lenders to reach core capital reservesof 9 percent after writing down their sovereign debt holdings,according to a statement after all 27 EU leaders met.

Banks below that target would face “constraints” on payingdividends and awarding bonuses. The leaders showed little appetitefor an EU-run plan, bowing to German calls to make European moneyavailable only as a last resort.

Details need to be worked out by EU finance ministers, EUPresident Herman Van Rompuy said in a statement without announcingwhen that will be done.

'Full Package'

The bank-aid program “will only go ahead when the other parts ofa full package go ahead and further progress on that needs tohappen tonight,” U.K. Prime Minister David Cameron told reportersafter he left and the heads of euro states continued theirdeliberations.

Dramas played out across Europe during the day, with Merkelwinning a German parliament mandate to negotiate on the rescuefund, Italian Prime Minister Silvio Berlusconi hustling to preparenew budget cuts and EU representatives jousting with banks over thecosts of reviving Greece.

“There is a fatigue on financial markets listening topoliticians always coming up with the ultimate, final plan,”Carsten Brzeski, an economist at ING Group in Brussels, said in aninterview with Francine Lacqua on Bloomberg Television.

Euro leaders won't rule out a forced Greek writedown, whilecontinuing to pursue a “voluntary” solution that would scale up aJuly accord that foresaw 21 percent losses for bondholders, the EUofficial said.

Bank Lobbying

The Institute of International Finance, which lobbies on behalfof 450 financial firms, sweetened its offer yesterday, proposing togo beyond the 40 percent losses it mooted last week, said twopeople with knowledge of the talks.

Leaders weighed two options for extending the reach of the fund:using it to insure bond sales and to finance a special investmentvehicle that would court outside money, including from theInternational Monetary Fund.

Sarkozy plans to call Chinese leader Hu Jintao tomorrow todiscuss China contributing, said a person familiar with thematter.

While markets clamor for a signal that the euro area will devote1 trillion euros or more to combating the crisis, the EU won't beable to produce a number until late November, the EU officialsaid.

To shore up confidence in Italy, Berlusconi came to Brusselswith a promise to adopt growth-boosting steps such as increasingthe retirement age in stages to 67 by 2026, selling 5 billion eurosof state assets over three years and easing labor laws.

ECB Pressure

Italy was under pressure to deliver the reforms to provide arationale for the European Central Bank to continue supporting theItalian bond market. Italy's Mario Draghi, set to become ECBpresident on Nov. 1, said earlier in Rome that the steps are “veryimportant” and “need to be done swiftly.”

The cracks in Berlusconi's coalition widened, preventing himfrom delivering the comprehensive plan to boost growth and trim thedebt load. Newspaper la Repubblica reported that the embattledleader hatched a secret deal to resign in January and hold earlyelections.

“Either this government is able to take structural reforms or weneed another government,” Mario Baldassarri, chairman of the SenateFinance Committee and a former Berlusconi ally, said in aninterview in Rome. “We will see in the next few days or week”whether Berlusconi resigns.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.