European leaders “have risen to the challenge,” GermanChancellor Angela Merkel said. French President Nicolas Sarkozyproclaimed their July 21 summit a “historic turning point” andLuxembourg Prime Minister Jean-Claude Juncker called it the “finalpackage, of course,” to extinguish the debt inferno.

Then they went on vacation. Before they returned to work,the deal fizzled.

The euro's stewards are back in Brussels today for anemergency summit struggling to heed the world's calls to once andfor all eradicate what U.S. Treasury Secretary Timothy F. Geithnercalled the “catastrophic risk” of the debt crisis. A potentialGreek default threatens shockwaves that could engulf Italy andFrance, jolt the banking system and spell havoc for the globaleconomy.

“Buck up, this crisis is going to be with us still for awhile,” Barry Eichengreen, an economics professor at the Universityof California at Berkeley, said on “Bloomberg Surveillance” withTom Keene and Ken Prewitt. “I fear they're not going to take thekind of steps to resolve it.”

European stocks were little changed as U.S. index futuresrose and Asian shares slipped. The benchmark Stoxx Europe 600 Indexdecreased less than 0.1 percent to 240.2 at 8:26 a.m. in Londonafter declining 0.7 percent yesterday. The measure has tumbled 17percent from this year's peak on Feb. 17. The MSCI Asia PacificIndex declined 0.1 percent today, while Standard & Poor's 500Index futures advanced 0.5 percent.

Days of Haggling

The gathering marks the interim climax to six days ofhaggling among finance ministers, central and commercial bankers,chancellors, presidents and prime ministers over the shape ofGreece's second bailout, the recapitalization of banks and theretooling of the 440 billion-euro ($612 billion) rescue fund into amore potent weapon.

The 14th crisis summit in 21 months starts with a meetingof all 27 European Union leaders at 6 p.m. The real business getsunder way at 7:15 p.m. when chiefs of the 10 non-euro nationsdepart, leaving the rest to hash out a strategy that they alreadysay requires more work.

The cancellation of a finance ministers' meeting to precedethe summit underscored the holes in the plan. The finance chiefswill now meet at an as-yet undetermined time after the summit tocomplete its main elements, including safeguarding banks andwriting down Greek debt, according to an EU official.

Global exasperation with Europe's response is deepening,with politicians from Australia to North America prodding the euroarea to get ahead of the crisis before it infects the worldeconomy. A Group of 20 meeting in Cannes, France, on Nov. 3-4 isEurope's self-imposed deadline.

'Europe Must Deliver'

Europe must “deliver on the commitments they've made,”Geithner said yesterday in Wilmington, North Carolina. “They'resaying a lot of the right things and they're clearly working on itand they're moving with a greater sense of urgency. That's allwelcome, but until we see what they come together with, it's alittle hard to evaluate.”

Before arriving in Brussels, some leaders have unfinishedbusiness at home. Merkel, the biggest contributor to Europe'sbailouts, has to win parliamentary approval of her anti-crisisstrategy, while Italian Prime Minister Silvio Berlusconi strainsfor more budget cuts.

Greece, recipient of 110 billion euros as the first crisisvictim last year, is counting on bond investors to accept“voluntary” losses as high as 60 percent and on euro governmentsand the International Monetary Fund to lend at least 109 billioneuros more to enable it to pay its bills.

Writedowns Up to 60%

“We're currently debating 50 percent to 60 percent inEurope,” Luxembourg's Juncker said in an interview in Zurichyesterday. “We'll have parallel talks in Brussels with banks andwe'll need to see what's the result of a voluntaryparticipation.”

Strikes, tear gas and 120,000 tons of uncollected garbageon the streets of Athens accompanied the Greek parliament'sapproval of more austerity measures, as Greek citizens' toleranceof EU-mandated budget cuts was stretched to the breakingpoint.

Greece's bond writedowns will determine the amount ofdamage to European banks, which need around 100 billion euros ofextra capital, the EU estimated last week.

What started in Greece and spread to Ireland and Portugalnow stalks Italy, the third-biggest euro economy. Europeanofficials expect Berlusconi to show up in Brussels with specificson containing pension spending and a timeline for meetingdeficit-reduction targets.

Italian Yields

Berlusconi has yet to complete an austerity package whippedtogether on an August weekend that led the European Central Bank tostart buying Italian bonds. The gains from that support haveevaporated. Ten-year Italian notes yield 389 basis points more thanbenchmark German bunds, the same as on Aug. 4.

The Frankfurt-based central bank has bought 169.5 billioneuros in bonds so far, starting with Greece, Ireland and Portugallast year, then extending the coverage to Italy and Spain. Theincreasingly controversial policy contributed to decisions by bothGermans on its council to quit this year.

Euro-area leaders are debating how to obtain an ECBcommitment to maintain the purchases without appearing to giveorders to the politically independent central bank, three peoplefamiliar with the deliberations said.

ECB involvement is crucial because mechanisms to scale upthe government-financed rescue fund — the European FinancialStability Facility — won't be ready immediately after the summitand may not deliver enough, the people said.

More Talks Needed

Talks on boosting the EFSF's 440 billion-euro war chesthave centered on two models — using it to insure bond sales and tofund a special investment vehicle that would court outside money,including from the IMF. Discussions of the second option only beganthis week, the people said. Its effectiveness would hinge onnegotiations with credit-rating companies and internationalinvestors, they said.

Debate is continuing over how to pair a planned 500billion-euro permanent fund with the current pool, which isscheduled to be wound down even though its loans for Greece'ssecond bailout package will run for up to 30 years.

Leaders will consider amending or scrapping a clause in thestatutes of the permanent fund, the European Stability Mechanism,that caps lending during the transition phase between the two fundsat 500 billion euros. One proposal is to leave the EFSF'scommitments — 150 billion euros and counting –untouched by thecap.

Twin Funds

In case the EFSF is fully spent once the ESM takes over,getting rid of the limit would give Europe twin funds with combinedclout of 940 billion euros. Also up for debate is whether to tonedown the ESM's provisions for bondholder burden-sharing, the peoplesaid.

“Europe is finally moving in the right direction but thereis a sense that the remedies will fall short of the shock and aweresponse that is required to stabilize market expectations,”Domenico Lombardi, a former IMF official now at the BrookingsInstitution in Washington, said yesterday on BloombergTelevision.

Bloomberg News

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