EU sources confirmed that the overall plan is to considerably reduce Greek debt, which is close to 175% of GDP, to make it possible for the economy to cope with what was left and begin to grow.
However, any attempt to cut Irish debt is likely to be met with a firm no, in line with the responses so far from the ECB and the EU.
UCC economist Seamus Coffey said it would be difficult to make a case for it unless the debt went above the forecast 115% and the country found it impossible to meet the targets set under the austerity plan.
Commission president Jose Manuel Barroso (pictured) went to the European Parliament with a five-point plan to break what he called the vicious circle of doubts over euro sovereign debt and the stability of the banking system, admitting that the banking and sovereign crisis were inextricably linked.
His action was an attempt to galvanise EU leaders, especially France, Germany and the other triple-A rated countries, into taking the kind of concrete action that the markets have been calling for for months.
“Doubts over Greece’s future jeopardises the future of the EU,” he said, adding they had to go further than what was agreed at the July summit since it failed to prevent the Greek problems affecting other eurozone countries.
There they agreed a deal drawn up by the banks offering EU-guaranteed swaps that they estimated could be counted as a 21% haircut, but which reduced the Greek debt by just 1%, according to economists.
Mr Barroso called for “a sustainable solution for Greece through an effective second adjustment programme, based on adequate financing through private sector involvement and the public sector”.
For some weeks experts have been planning an orderly default behind the scenes but need to ensure that European banks are in a position to withstand the consequences, especially those still holding sovereign debt of Greece.
Mr Barroso said the banks “urgently” needed to increase their core tier one capital ratios. Sources confirmed that all of the EU’s systemic banks have been asked to test their capital against the sovereign debt they are holding and increase it to at least 9%.
Just where the extra money — estimated at between €100bn and €200bn — is to come from has been a matter of dispute.
However, Mr Barroso supported Germany’s stance, saying that banks should raise the money themselves initially, falling back on member states if necessary but tapping the European Financial Stability Facility (EFSF).
This requires that changes to the EFSF are passed by all eurozone governments. Mr Barroso appealed to Slovakia, which rejected the changes on Tuesday night and saw its government collapse in the process, to pass it. The deal is expected to go through tomorrow.
But there is still uncertainty over the details of how the EFSF would work as some countries fear there is too much emphasis on lending money and not enough on insuring a tight regime on member states’ budgets, and with the reins of power firmly in the hands of the Commission.
Mr Barroso also said that the action that was required now would not need a treaty change, which will be music to the ears of Taoiseach Enda Kenny, whom he meets in Brussels early this morning to discuss the coming summit on Sunday, October 23.