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German Chancellor Angela Merkel listens to a speech at the German federal parliament, Bundestag, in Berlin, Germany, Wednesday, Oct. 26, 2011.

Michael Gottschalk/AP

German chancellor Angela Merkel urged the private owners of distressed Greek sovereign debt to take big losses on their holdings as she promised that Germany would do everything possible to defend the euro.

"The world is watching Europe and Germany," she said in a speech Wednesday morning to the Bundestag, the lower house of parliament, in Berlin. "It's watching whether we're ready and able in the hour of Europe's deepest crisis since the end of World War II to accept responsibility."

Ms. Merkel was speaking just before the Bundestag approved plans by a large majority to boost the firepower of the €440-billion European Financial Stability Facility (EFSF), the main crisis-fighting weapon in the European Union's arsenal.

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Armed with her "yes" vote, Ms. Merkel will have more authority in promoting the crisis-fighting measures she wants at today's crucial EU summit in Brussels, the second since Sunday. The summit was called to approve, and provide details, on the ultimate size and use of the EFSF, the recapitalization of weak banks and the likely "haircuts" on the privately held Greek debt.

While expectations are low that the so-called Grand Plan would be finalized Wednesday, Ms. Merkel said the target for Greece's debt load, as a percentage of GDP, was 120 per cent by 2020. That implies a 50-per-cent writedown in the face value of the debt owned by private investors. Greece's debt-to-GDP is now about 150 per cent and was forecast to rise to a crushing 190 per cent next year.

While moving to 120 per cent from 150 per cent is a relatively large fall, no economist thinks it is enough to put Greek finances on a sustainable footing, especially since the economy continues to shrink, thanks to ever deeper austerity measures (Canada's debt-to-GDP is about 80 per cent). This suggests either that Greek debt will have to be written down again or that the EU is preparing to keep it as a ward of the state for many years.

In a note published Wednesday morning, economists at France's Société Générale said "the real issue for Greek debt sustainability is the willingness of the official sector to fund Greece for a long period of time."

By Wednesday, it was apparent that much of the detail required to complete a comprehensive debt fighting package would go lacking. There is already talk of a third summit within the next week.

Investors appear to have discounted the likelihood of a breakthrough at Wednesday's summit. In Europe, the stock markets were up marginally, as was the euro against the dollar.

Adding tension to the summit will be Italy's response to EU demands, delivered on Sunday, for an economic reform package that would pull the euro zone's third largest economy out of its doldrums. A dispute between Italian prime minister Silvio Berlusconi and his coalition partner Umberto Bossi, of the eurosceptic Northern League party, almost sank the Italian government Tuesday night.

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Both men later announced that they had reached an agreement on pension reform, but gave no details and it remains to be seen whether the effort will be enough to satisfy the EU leaders. Their fear is that Italy, Europe's most indebted country, would be too big to save if it were to become incapable of rolling over its debt.

Italian bond yields have been soaring as investors took the view that the Berlusconi government was moving too slowly on austerity and growth measures.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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