Merkel, Sarkozy hail crisis progress

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Germany and France cited "progress" in efforts to contain the eurozone debt crisis Saturday as Europe agreed to plug a $150-billion hole in banks' reserves so they can face losses on Greek debt.

The deal to recapitalise came after ministers put the squeeze on banks to accept write-downs of "at least 50 percent" to allow a new bailout for Athens to go ahead.

That came amid dire warnings that Europe's debt crisis threatened to provoke a global recession.

"But we need to negotiate with the bank sector," said Belgium's Finance Minister Didier Reynders after lengthy ministerial talks Friday and Saturday, preceding back-to-back crisis summits, Sunday and Wednesday.

French proposals for the eurozone's wider rescue fund to tap into unlimited European Central Bank funds seemed to have hit the rocks, according to a Dutch minister.

But as German Chancellor Angela Merkel and French President Nicolas Sarkozy headed into talks to overcome their differences, both cited "progress" in struggling to agree a wide combat plan to contain the crisis.

"Finance ministers made progress," Merkel said. But "there will be no definitive decisions before Wednesday."

Negotiations "will be difficult", she added. "This is why it is important for France and Germany to be active".

Greek Prime Minister George Papandreou said the differences had to be resolved in the coming days "not only for the future of Europe but for the existence of Europe."

Germany meanwhile suggested that there should be a radical overhaul of the EU's treaty rule-book. It proposed enabling the European Court of Justice to act against states that broke their public finance obligations to EU partners.

Under the bank recapitalisation plan, "107-108 billion euros" would be pumped in to bring lenders' core cash reserves up to a newly raised nine percent of holdings, one diplomat told AFP.

But another diplomat said Spain, Italy and Portugal had each had to be separately convinced by officials of the European Banking Authority and the European Central Bank.

British finance minister George Osborne said "real progress" had been made, but London would be "keeping up the pressure over the next couple of days" to craft a lasting, overall solution to the crisis.

A final deal is largely dependent on the parallel, but separate talks on a write-down of Greek debt held by banks.

In exchange for "voluntary" agreement -- so as not to trigger default insurance contracts -- Greece would get new rescue loans from eurozone and EU partners, plus the International Monetary Fund.

Europe and the IMF would only proceed with a second planned Greek bailout of 109 billion euros ($151-billion) if banks accepted losses of "at least 50 percent" on their debt holdings, diplomats said.

Many Italian and Spanish banks, like the French, have seen their credit rating downgraded in recent weeks as fears rise over their exposure to sovereign debt.

Polish Finance Minister Jacek Rostowski said plans for the banks would only work as "part of a comprehensive package".

That would have to include "the creation of a large and credible firewall in terms of preventing contagion spreading from one sovereign to another."

Governments nonetheless remained divided on how to boost the firepower of the 440-billion-euro European Financial Stability Facility (EFSF), Dutch Finance Minister Jan Kees De Jager said.

A plan long championed by Sarkozy to turn the EFSF into a bank that could draw money from the European Central Bank (ECB) "is no longer an option," De Jager said.

Merkel and the ECB had opposed the idea.

Talks between the two leaders were expected to focus on two alternative scenarios: using the EFSF to insure partial losses on future eurozone bonds, and proposals for to create a special fund that would entice emerging economies to support eurozone economies.

But there were still "big differences" on which road to take, De Jager added.

On Friday, eurozone ministers agreed to unblock eight billion euros in loans for Greece from a first bailout package in 2010 -- and IMF chief Christine Lagarde was expected recommend the same, said one source close to the Brussels talks.

The eurozone countries are racing to settle an all-encompassing deal before the world's top economies meet at a G20 summit in Cannes on November 3-4.

© 2011 AFP

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