Merkel-Sarkozy summit to focus on shoring up banks

The leaders of France and Germany hold a summit here on Sunday aimed at finding common ground on a plan to recapitalise banks, crucial for digging the eurozone out of crisis.

German Chancellor Angela Merkel (L) waves beside Bavaria's State Premier Horst Seehofer during the party congress of the German Christian Social Union Party (CSU) in Nuremberg, southern Germany, on October 7, 2011.

German Chancellor Angela Merkel will meet French President Nicolas Sarkozy amid signs that some European banks are feeling the strain of the lingering debt crisis which has pushed Greece to the brink of bankruptcy.

The woes of Franco-Belgian bank Dexia have 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.

On the eve of the Berlin summit, International Monetary Fund chief Christine Lagarde, who was the first to call for banks to be urgently recapitalised, met the French leader in Paris.

French banks in particular are seen as overexposed to Greek, Italian and Spanish debts, and leaders want to prevent any new bigger reduction in Greece's debt triggering a banking crisis across the continent.

"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.

The current planned 21-percent cut 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 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.

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

The French government has denied differences with Germany, calling for a coordinated bid by European countries to recapitalise banks, while the European Commission has given member states 10 days to agree a plan.

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


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