Euro zone’s leaders emerged blinking into the night after hours of negotiations with hopes of a new dawn – but crisis summits like this one unlikely to become thing of the past

THE TURNING-POINT came well after midnight. The leaders of the 17 euro zone countries and a clutch of EU chiefs had been sitting around the summit table for more than six hours, yet still there was no sign of a deal.

They were under immense pressure. After two years of non-stop crisis management, this was the moment the Europe had billed as the final reckoning with its debt crisis.

They have thrown hundreds of billions of euro at the problem, held more a dozen summits and countless bilateral meetings. But all of that failed to do the deed. The crisis kept growing. To walk out now with a fudge on the most pressing question would have been disastrous.

“Nobody could afford to have no deal. If there was no deal on Wednesday evening then I can’t imagine what would have happened. It’s a very dangerous situation,” said a high-level diplomatic source.

Most of the deal was in place. A €106 billion scheme to recapitalise Europe’s weakest banks was agreed, followed by a plan to expand the fire-power of Europe’s bailout fund to some €1 trillion.

These were written into a draft communique, as were measures to deepen policy co-ordination in the euro zone.

On the most pivotal question, however, the document was blank. There was no reference to the all-important “haircut” for Greek creditors, an absence which betokened the lack of agreement with the banks who hold most of the country’s debt.

Officials paced the corridors of the Justus Lipsius building. Diplomats fretted. Journalists saw deadlines pass. There were hours to go before markets reopened.

The size of the loss to be imposed on Greek creditors has bedevilled EU leaders for months. In the face of opposition from the European Central Bank, they did a deal in July to cut the country’s debt by 21 per cent. The initiative floundered as Greece’s recession worsened and a new outbreak of turmoil took hold in markets. Within weeks, the ECB was buying the bonds of Italy and Spain.

This called for a new rescue plan, something bigger and bolder than before. There would be a bigger haircut. To guard against the risk of contagion, weakened banks would be told to boost their capital and the bailout fund would be expanded.

This is fraught with risk for the prime ministers and presidents of Europe. With acute reluctance last year, they agreed to underwrite Greece. At great political cost, the expanding crisis has drawn ever deeper into each other’s affairs as Ireland and then Portugal were rescued. With Italy and Spain in the line of fire, the ructions are not set to stop any time soon.

After weeks of fitful and, at times, bad-tempered talks, the leaders at the summit had reached broad agreement on the size of the Greek haircut.

France, conscious of its own banks’ exposure to Greek debt and spooked by anything that might jeopardise its cherished triple-A credit rating, had wanted the debt cut to be as low as possible.

Nicolas Sarkozy, the pugnacious French president, had warned of the need to avoid anything that might be construed as default. But German chancellor Angela Merkel wanted the haircut to be high. The issue deepened a rift between the two leaders, one which went unsettled for weeks in run-up to a summit which was scheduled last Monday week and then delayed to Sunday.

The situation was increasingly tense as decision time loomed. Sarkozy dashed to Frankfurt last Wednesday week for emergency talks with Merkel, the outgoing ECB chief Jean-Claude Trichet, IMF managing director Christine Lagarde, European Council president Herman Van Rompuy and EU Commission president José Manuel Barroso.

In the middle of the meeting he received a phone call from Paris, where his wife Carla Bruni Sarkozy was giving birth to their daughter Giulia. He left the room for privacy, only to be confronted with dozens of officials and security people. The talks broke up without any agreement, leaders taken aback when Merkel said she would need the approval of a parliamentary committee to overhaul the bailout fund.

It was the same when euro zone finance ministers met last Friday in Brussels. By that stage a second summit had been called for Wednesday this week. The objective was to give Merkel breathing space to bring MPs on board in Berlin, but differences over the effort to cut Greece’s debt still ran deep. Time was running out.

Some ministers wanted to forge ahead with a big haircut even if bondholders did not agree, still more urged caution. They were unable to agree a negotiating mandate for EU officials to enter talks with the Institute of International Finance, which represents the world’s biggest banks. Only one day remained before the Sunday summit.

Jean-Claude Juncker, head of the euro zone ministers and Luxembourg’s prime minister, was already in informal contact with the IIF managing director Charles Dallara but a mandate was required. Juncker spoke with Van Rompuy, who called Merkel, Sarkozy and others to a pre-summit meeting in his office on Saturday night. In the end the French leader gave in, clearing the way for the Sunday summit to settle on a negotiating mandate.

Three days of talks followed. The banks were offered a 40 per cent haircut but some European governments wanted 60 per cent or more. While there were many twists and turns in the talks, euro countries settled on a push to seek a 50 per cent write-down on Greek bonds. This was more than double the cut in July, but the leaders would offer the banks a sweetener in the form of a €30 billion credit enhancement.

By midnight on Wednesday, therefore, the impasse was no longer between the politicians themselves but between them and the bankers who would have to suffer the losses. The leaders of the 27 EU countries had gathered for a special summit at teatime to review the talks. In the interval before the euro zone summit, most of the figures who had been at the Frankfurt meeting a week earlier went into conclave for a few minutes.

Europe was still far apart from the banks. In a statement issued just before 11pm, Dallara made it clear the haircut question was not settled. “There is no agreement on any element of a deal.” Speculation inevitably followed that the summit might be on the cusp of failure, with all the risk that brought.

The talks adjourned for 45 minutes just after midnight. In that window, according to French and other sources, Sarkozy, Merkel, Lagarde and Van Rompuy summoned the banks to a private meeting elsewhere in the Lipsius complex. Dallara was accompanied by a senior French banker from BNP Paribas.

It was a short meeting, lasting no longer than 10 minutes. The pre-eminent European powers made a “best and final offer” to the banks and took their leave.

“It was not a negotiation,” said the diplomatic source. The banks were presented with an ultimatum. “The financial sector has no interest at all in a major clash and a major crisis.” The French and German leaders confirmed this account. “We only made them one offer,” Merkel said. Sarkozy told reporters the meeting was “not to negotiate but to inform them of decisions taken by the 17”. He added: “They reflected on it, did some work and gave it their agreement.” Two hours would pass, however, before the IIF signalled it would go along with the deal. It was approaching 3.30am by the time the news seeped out. Deal on.

Dawn was but hours away. It was dark, cold and still in the European quarter in Brussels, but eastern markets had already opened.

In the summit room, it was decided that EU finance ministers would agree the details of the strengthened bailout fund in November. Sarkozy would speak to Chinese president Hu Jintao the following morning to discuss Beijing’s possible participation in the bailout fund.

A statement was agreed. Officials moved quickly to produce a final draft, which was signed off just before 4am. Leaders emerged to face the cameras one by one, their faces pale and taut with fatigue.

Merkel’s body language was strikingly positive – it had been a good day for her – and she smiled widely as she prepared to speak to the press.

Next door, Sarkozy looked fatigued but satisfied. “We have found a durable solution to the Greek crisis,” he said, speaking slowly and gripping his lectern firmly.

“These are extremely weighty decisions that nobody could have imagined a year ago ... I think the result will be greeted with relief by the whole world.” Another marathon talks session was finished. In all likelihood, there will be more of these before the crisis is finally settled. As they left the Lipsius building, Taoiseach Enda Kenny summed up the sense of exhaustion felt by many. “Obviously it was a very long day and a long meeting,” he said.