Merkel, Sarkozy begin key summit on euro debt

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French President Nicolas Sarkozy and German Chancellor Angela Merkel began a key summit here Sunday on steps to combat debt turbulence in the eurozone, an AFP reporter said.

The leaders of Europe's two biggest economies are expected in particular to try to find common ground on details of a plan to recapitalise Europe's banks amid fears of a crippling credit crunch.

Talks are expected to last an hour, with a news conference scheduled at 1530 GMT, followed by a working dinner.

The meeting comes in the face of evidence that some European banks are creaking under the strain of the mounting debt crisis which has pushed Greece to the brink of bankruptcy.

US President Barack Obama has warned that the European woes, with their potential to touch off a credit freeze, pose a threat to the global economy and has called on European leaders to act fast to stem it.

Troubled Franco-Belgian bank Dexia has already brought Belgium into the line of fire with a warning by credit ratings agency Moody's, while Fitch has downgraded Italy's and Spain's credit ratings.

France, Belgium and Luxembourg announced Sunday that they had reached a deal to dismantle Dexia, the first victim of the eurozone debt crisis.

International Monetary Fund chief Christine Lagarde, who was the first to call for banks to be urgently recapitalised, has met both Sarkozy and Merkel in the last few days.

French banks are seen as particularly overexposed to Greek, Italian and Spanish debt. Leaders want to prevent any new, bigger reduction of Greece's debt triggering a banking crisis reminiscent of 2008 which set off a global recession.

"We must ensure that the banks have sufficient capital" to face any possible increase in the reduction of Greece's debt, Sunday's Frankfurter Allgemeine Zeitung quoted German Finance Minister Wolfgang Schaeuble as saying.

A planned 21-percent "haircut" or reduction in value of the debt banks hold in an exchange for lowering Athens' debilitating repayments in the next few years -- which was agreed in July -- could "perhaps" be insufficient, he added.

Germany, Europe's strongest economy and effective eurozone paymaster, wants under-pressure banks to first turn to investors for funds before appealing for national or European cash.

The EU's 440-billion-euro ($589-billion) European Financial Stability Facility (EFSF) bailout fund could intervene as a last resort "only if a country cannot do this with its own means", Merkel said Friday.

France, fearful of losing its top-notch AAA credit rating, would rather dip into European funds than its own coffers.

However the French government has denied differences with Germany, calling for a coordinated bid by European countries to bolster affected banks.

The European Commission aims to agree a plan in the coming days, ahead of an EU summit October 17-18.

The IMF estimated the eurozone debt crisis has directly cost banks in the European Union some 200 billion euros in sovereign credit risk in the past two years.

A report in Sunday's Welt am Sonntag said a compromise was being worked out between the French and German positions.

In exchange for Berlin's demand for a bigger cut in Greek debt, France would obtain agreement that the EFSF could be refinanced by the European Central Bank, it said.

Critics say Merkel in particular has had a hesitant, reactive approach to the crisis, with the German leader facing calls to take decisive action to prevent contagion to Europe's most vulnerable economies.

World Bank chief Robert Zoellick told German business weekly Wirtschaftswoche in its issue to hit newsstands Monday that Berlin had shown a "total lack" of leadership: "The longer it lasts, the more money it will cost and the fewer options for action there will be," he said.

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© 2011 AFP

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