NEW YORK (CNNMoney) — European Union officials said Wednesday they’ve reached a “broad agreement” on a plan to boost bank capital, but negotiations with private sector bondholders over Greek debt remained deadlocked.
“There has been no agreement on any Greek deal or a specific ‘haircut,’ ” said Charles Dallara, director of the Institute of International Finance, which represents banks and private sector investors. “We remain open to a dialogue in search of a voluntary agreement. There is no agreement on any element of a deal.”
Euro area leaders spent Wednesday in talks with the private-sector bond holders over a proposed write down — known as a “haircut” — of as much as 60% on Greek bonds.
The write downs are one of three inter-related problems the parties must solve to devise a comprehensive solution to Europe’s debt crisis. They must also determine how to leverage a Euro bailout fund and stabilize the banking sector.
Earlier on Wednesday, the European Council issued a statement saying heads of state had agreed to raise capital requirements for banks vulnerable to losses on Euro area government bonds.
Under the terms outlined by EU officials, banks would be required to sharply increase core capital levels to 9% to create a buffer against potential losses. The amount to be raised would be determined after accounting for declines in the value of euro area government bonds, including debt issued by Greece.
The banks would have until the end of June 2012 to meet those new requirements, according to a statement.
“The overarching goal of the exercise is to foster confidence in the European banking sector,” said European Council president Herman Van Rompuy.
It was unclear how much money the banks would need to raise, but the International Monetary Fund has estimated that European banks face an overall credit risk of at least €200 billion.
Under the proposed plan, banks would first have to try to raise capital by restructuring or converting debt into equity.
Banks would also be able to receive government support if they have trouble raising capital on their own, according to the statement. And euro area governments that cannot afford to support banks would be able to borrow money from the EU bailout fund.
German Chancellor Angela Merkel has said repeatedly that banks should first raise money in the private market before seeking state aid.
Under the proposed plan, banks that lack sufficient capital could also be prevented from paying dividends and bonuses.
In addition to the bank recapitalization plan, euro area leaders continue to work on a promised comprehensive set of measures to address the eurozone debt crisis.
The package is expected to include a plan to increase the firepower of the EU rescue fund, known as the European Financial Stability Facility.
In a key vote earlier Wednesday, German lawmakers backed a proposal to use the €440 billion fund to partially insure new issues of euro area government bonds.
The lawmakers also signed off on a new investment vehicle that could be used attract capital to the EFSF from private sector players such as sovereign wealth funds.
China has “expressed interest” in the so-called special purpose investment vehicle, an official told CNN.
— CNN International’s Nina Dos Santos contributed to this article from Brussels.