Leaders meet on crunch weekend for European banking

9th October 2011, Comments 0 comments

French and German officials were scrambling to put together a compromise agreement on recapitalizing major European ahead of Sunday's meeting between the two countries' leaders.

French President Nicolas Sarkozy meets German Chancellor Angela Merkel in Berlin on Sunday to discuss how best to recapitalise banks overexposed to risky sovereign debt.

But even as he packed his bags Saturday, one senior German minister was suggesting that Greece might have to be given more breathing space to beat its debt crisis.

"We have to manage things so that the banks have enough capital" to deal with any further negotiated reduction of the Greek debt, Finance Minister Wolfgang Schaeuble told Germany's Frankfurter Allgemeine Sonntagzeitung, out Sunday.

Already in July, eurozone leaders agreed a 21-percent debt "haircut" for Greece. But Schaeuble suggested that this might not be sufficient.

Germany's Welt Am Sonntag meanwhile, will on Sunday report that France and Germany are close to a compromise on how to approach the crisis.

Merkel, whose country is Europe's strongest economy and effectively the eurozone's paymaster, has argued that under-pressure banks should turn to investors for funds before appealing for national or European cash.

France, the eurozone's next biggest player, is reportedly more ready to turn to public funds to shore up its at-risk lenders.

A state investment fund has already drawn up plans to rescue Franco-Belgian bank Dexia and a source close to the dossier in Belgium said the French and Belgian prime ministers would meet to discuss it on Sunday.

According to Welt Am Sonntag, the compromise deal will involve France getting the public refinancing for the European rescue fund it has been seeking.

In return, Germany will get the second "haircut" on the Greek debt it has been seeking -- and which Schaeuble's press comments hinted at.

There is a growing sense of urgency to resolve the crisis.

On Friday the European Commission gave member states 10 days to agree a plan to shore up their lenders to cover potential losses.

The International Monetary Fund thinks that will take between 100 and 200 billion euros ($135 billion and $270 billion).

The same day, ratings agency Moody's downgraded a dozen British banks over concerns that government support for lenders could be withdrawn. Also Friday the Fitch agency meanwhile downgraded Italy's and Spain's credit ratings.

On Saturday, IMF managing director Christine Lagarde had talks in Paris with Sarkozy. She made no comment to press either before or after their meeting.

But French banks in particular are seen as overexposed to Greek, Italian and Spanish debts. European leaders fear that a default in a weaker Mediterranean economy could trigger a financial crisis across the continent.

The recent moves by the ratings agency have concentrated minds in France, where top officials fear the country could lose its top notch AAA credit rating.

The debt crisis, which began in Greece, last year forced Ireland and Portugal to seek international bail-outs. Now Italy and Spain are in the firing line, threatening to sink the entire euro project as banks scramble to raise funding.

Fears of a "credit crunch" have raised the spectre of 2008, when US giant investment bank Lehman Brothers collapsed and could have taken the global financial system with it but for massive government support.

The French, German and Italian employers' federations meanwhile appealed Saturday for greater European integration.

"So that the foundations can be laid for a prosperous and politically strong 21st century Europe, we call on the European Union to start work on a new treaty, which would be a new step towards closer political and economic union," France's Medef, Germany's BDI and Italy's Confindustria said.

Sufficient capitalisation for banks was essential to resolve the current crisis, they stressed.

World Bank President Robert Zoellick agreed. In an interview with economic weekly WirtschaftsWoche, he accused Merkel's Germany of lacking vision.

Germany, while it is more cautious than France about using the already stretched 440-billion-euro European Financial Stability Facility (EFSF) to recapitalise banks, did eventually agreed to expand it.

Of the 17 eurozone members, only Malta and Slovakia have yet to approve the expansion of the EFSF.

Malta is expected to give the go-ahead on Monday and Slovakia's deadlocked coalition will meet on the same day, one day before Tuesday's unpredictable parliamentary vote that could save or sink the rescue fund.

© 2011 AFP

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