A day ahead of a crucial crisis meeting, European Union finance ministers have been trying to agree on how high a Greek debt cut should be, with many observers predicting banks will have to accept a writedown of 60 percent.

Some EU diplomats believe that without a 60 percent "haircut" it will be impossible to re-introduce Greece to financial markets in the next few years.

Greece's deficit is expected to hit 186 percent of GDP by 2013, but a significant debt cut could reduce that figure to 120 percent.

It is also estimated that Greece would need about 250 billion euros ($347 billion) in credit from eurozone states until 2020 if it fails to get its cut now.

But it is unclear how much capital the banks will need to survive a further Greek debt cut.

Some speculate the figure may be as high as 100 billion euros for European high street banks, which - it is hoped - will raise funds privately and on the markets before states are asked to inject new cash.

Pan-European threat

Speaking in Brussels, Britain's finance minister George Osborne said the eurozone debt crisis is starting to threaten the whole of Europe, and he called for a comprehensive solution.

"We've had enough of short term measures - sticking plasters that just get us through the next few weeks," said Osborne. "We need to address the root causes of this problem. We need a lasting solution that will help all of Europe's economies grow."

What has been decided so far is that Greece will receive the sixth tranche in its bailout plan - totaling eight billion euros.

EU finance experts, the European Central Bank and the International Monetary Fund were reluctant to make the sixth payment, but it was felt it was the only way to avoid a disorderly Greek default - for now.

Greek Finance Minister Evangelos Venizelos was relieved. "The decision [to pay] the sixth tranche is a very good, positive and constructive step," Venizelos said. "But Greece is not the central problem."

French-German prep talk

The French President Nicolas Sarkozy and German Chancellor Angela Merkel meet late on Saturday to discuss some of the finer points of disagreement before the main summit on Sunday.

Final decisions are expected this coming Wednesday, giving Germany enough time to have the German parliament sign off on any new plans.

But even before leaving for Brussels Merkel made her irritation clear, telling a youth meeting of her Christian Democratic Party (CDU) that EU states that fail to look after their economies should face harsher legal penalties.

"It should be possible to sue a country at the European Court of Justice, if that country breaks the EU's stability and growth pact." said Merkel.

Germany was one of the main instigators of the stability and growth pact when it was adopted in 1997, but along with France became one of the first to break it, and had broken it three years in a row by 2003.

EU foreign ministers are also in Brussels and are discussing ways to change existing EU Treaties as another response to the debt crisis that has troubled the eurozone for 18 months.

Author: Bernd Riegert / za
Editor: Ben Knight