Leaders prepare multi-trillion eurozone rescue plan

European officials are working on a grand plan to save the eurozone involving a massive bank recapitalisation, giving the bail-out fund several trillion euros of firepower, and a possible Greek default.

German and French authorities have begun work on a three-pronged strategy, the Sunday Telegraph reports.

Their aim is to build a "firebreak" around Greece, Portugal and Ireland to prevent the crisis spreading to Italy and Spain, countries considered "too big to bail".

According to sources, progress has been made at the G20 meeting in Washington where the world's leading economies have set themselves a six-week deadline to resolve the crisis.

Sources said the plan would have to be released as a whole, as the elements would not work in isolation.

First, Europe's banks would have to be recapitalised with many tens of billions of euros to reassure markets that a Greek or Portuguese default would not precipitate a systemic financial crisis. The recapitalisation plan would go much further than the €2.5bn (£2.2bn) required by regulators following the European bank stress tests in July and would include the under-pressure French lenders.

The second leg of the plan is to bolster the European Financial Stability Facility (EFSF). Economists have estimated it would need about Eu2trn of firepower to meet Italy and Spain's financing needs in the event the two countries were shut out of the markets. Officials are working on a way to leverage the EFSF through the European Central Bank to reach the target.

In exchange for an enhanced bail-out, the Germans are understood to be demanding a managed default by Greece but for the country to remain within the eurozone. Under the plan, private sector creditors would bear a loss of as much as 50% - more than double the 21% proposal currently on the table. A new bail-out programme would then be prepared for Greece.