European finance chiefs return to Brussels today on a mission toconvince global leaders that they can shield countries such asItaly and Spain from the spreading debt crisis by bulking out theirbailout fund.

As political turmoil envelops governments in Athens and Rome,finance ministers from the 17-member euro area will work on thedetails of plans to increase the muscle of the European FinancialStability Facility. Leveraging the fund would aim to ramp upspending capacity to 1 trillion euros ($1.4 trillion).

European leaders' failure to resolve the two-year-old debtcrisis threatens to drag down the global economy and triggeranother financial downturn. World leaders at a Group of 20 meetinglast week demanded euro governments do more to staunch the turmoil— including fleshing out how an expanded EFSF would work — beforethey commit fresh cash to the region.

“The leveraged EFSF may still turn into a bazooka, but so far itlooks more like a water pistol,” Joachim Fels, Morgan Stanley'schief global economist in London, wrote in a note to clientsyesterday. While ministers may furnish some detail on how the fundoperates, “don't hold your breath,” he wrote.

Ministers convene at 5 p.m. in Brussels for talks overshadowedby waning political fortunes of leaders in Greece and Italy. Greekpremier George Papandreou agreed to step down to make way for theformation of a unity government. In Rome, Italian Prime MinisterSilvio Berlusconi faced pressure to quit as his majority unraveledbefore a key parliamentary vote tomorrow. He repeated that he plansto stay on through 2013.

Italy's 10-year borrowing costs approached the 7 percent levelthat forced Greece, Ireland and Portugal to seek bailouts. The eurofell against the dollar, extending last week's 2.5 percent drop. Ittraded at $1.3710 as of 10:08 a.m. in Frankfurt, from $1.3792 onNov. 4. The currency has dropped 7 percent since May 2, when itreached a 2011 high, based on closing prices.

Stocks also declined, with the benchmark Stoxx Europe 600 Indexslipping 1.4 percent. Italy's FTSE MIB Index fell 0.6 percent.

Although EU officials have said an agreement on EFSF leveragingwon't be finalized today, finance ministers will discuss technicaldetails on how to partly insure bond sales and set up a specialinvestment vehicle to draw outside money. European leaders outlinedplans at an Oct. 26-27 summit.

Luxembourg Prime Minister Jean-Claude Juncker will chair today'smeeting of euro-area ministers. Finance chiefs from the rest of thebloc will meet tomorrow.

IMF Money

Even before the framework for the EU's new tools is fleshed out,European leaders have struggled to entice investment from outsidethe region. Chancellor Angela Merkel said last week that G-20nations wanted to know more before pledging money to theInternational Monetary Fund to lend to the EFSF.

Merkel told reporters at the G-20 summit in Cannes, France, onNov. 4 that there were “hardly any countries here that said theywill join up” with the EFSF. French President Nicolas Sarkozy saida deal may not come before February.

The leaders pledged that Europe will speed the implementation ofmeasures they negotiated at the summit 11 days ago, includingrecapitalizing banks and writing down Greek debt.

“I think that they are increasingly getting worried that thismight not be enough,” Carsten Brzeski, senior economist at INGGroup in Brussels, said in an interview yesterday. “This is theweak spot of the October conclusions.”

The ministers' meeting will be attended by newly installedEuropean Central Bank President Mario Draghi, who made his debutlast week by unexpectedly cutting the benchmark interest rate by aquarter point to 1.25 percent to aid growth. Draghi ruled outexpanding the ECB's purchasing of sovereign debt, calling theprogram “temporary” and “limited.”

The German government denied a report that G-20 leaders hadraised the possibility of using central bank reserves to helpbolster the bailout fund. Economy Minister Philipp Roesler told ARDtelevision early today that “the German gold reserve must beuntouchable.”

The Frankfurter Allgemeine Sonntagszeitung reported yesterdaythat using such reserves had been discussed and the issue may beraised again at today's meeting in Brussels.

Bloomberg News

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