Cameron Arrives For Key Euro Debt Summit

Sky's business correspondent Alistair Bunkall said: "The postponement of the EU Finance Ministers' meeting is being downplayed by governments.

"But it doesn't look good when you consider that it was the meeting intended to thrash out the detail to leave the leaders free to concentrate on the broader aspects.

"It puts into serious doubt, the potential for an agreement today."

If the 'bazooka' that's unveiled in Brussels doesn't appear to be loaded… well, let's not contemplate that.

Joel Hills, business presenter

This year alone, EU heads of government have met 20 times as countries like Greece, Italy and Spain struggle with huge debt and low growth.

The leaders of the richest countries in the 17-member eurozone, France and Germany, are still arguing over how best to calm jittery markets and ensure the contagion does not spread to the banking sector.

Greek debt was the catalyst for wider eurozone problems

Banks hold billions in government bonds, and there are concerns that a default by a country such as Greece could trigger a financial crisis similar to that which followed the collapse of Lehman Brothers in September 2008.

The European Council summit will focus on three main pillars: reducing the amount Greece owes to banks and investors, beefing up the bailout fund and pumping more cash into the banks to give them a cushion of capital.

France and Germany disagree over how the bailout fund, called the European Financial Stability Facility (EFSF) should be given more firepower.

Paris wanted to leverage the 440bn euro in the fund by harnessing it to the firepower of the European Central Bank(ECB), but Germany wants the Frankfurt-based ECB to remain independent.

The banks are saying: 'If you do this it is going to be a formal default and the contagion effects will be felt around the eurozone.

Wall Street Journal's Stephen Fiddler

It is likely the leaders will explore ways of allowing the EFSF to insure bondholders from some losses, while creating a "fund within a fund" to allow foreign investors to dabble in the so-called secondary bond markets.

As for Greek debts, banks and investors could be asked to swallow write-downs of up to 60%, much larger than the 21% deemed sufficient in July.

"The banks are saying: 'That's too much. If you do this it is going to be a formal default and the contagion effects will be felt around the eurozone'," the Wall Street Journal's Stephen Fidler said.

But the banks may have little choice, nor will they be able to resist demands to raise more capital to increase security in the system; a total of 108bn euro is being mooted.

Italy's Silvio Berlusconi is under immense pressure from the markets

A draft statement which will feed into Wednesday's meeting states the importance of bank recapitalisation.

It says "There is broad agreement on requiring a significantly higher capital ratio of 9% of highest quality capital and after accounting for market valuation of sovereign debt exposures..to create a temporary buffer."

German Chancellor Angela Merkel tested her plans for the EFSF at the Bundestag before the full summit, securing parliament's backing to strengthen the fund.

The vote will potentially give her more sway in the summit negotiations.

Mrs Merkel and French President Nicolas Sarkozy had also demanded that Silvio Berlusconi present firm plans to promote growth and reduce Italy's massive debt in time for Wednesday's meeting.

However, Sky Italia are reporting that its package of austerity measures has been rejected as insufficient by European leaders.

But it appears the broad structure of the rescue package is in place, as separate meetings of foreign ministers from the eurozone countries and from the entire union have been delayed until after the summit.

That could mean more flesh will be put on the bones of any subsequent statement later in the week, perhaps staggering the effects on the markets.