Merkel, Sarkozy reach agreement on bank sector

October 9, 2011 - 11:20 AM

BERLIN (AP) — The leaders of Germany and France, the eurozone's two biggest economies, say they have reached agreement on strengthening Europe's shaky banking sector.

German Chancellor Angela Merkel says she and French President Nicolas Sarkozy "are determined to do the necessary to ensure the recapitalization of Europe's banks."

Merkel spoke after talks with Sarkozy at Berlin's chancellery Sunday aimed at forging an agreement ahead of a summit of the European Union's 27 leaders later this month.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

BERLIN (AP) — The leaders of Germany and France, the eurozone's two biggest economies, are meeting to discuss new measures to counter the bloc's debt crisis and to seek ways to strengthen Europe's shaky banking sector.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are holding the talks at Berlin's chancellery Sunday to forge an agreement ahead of a summit of the European Union's 27 leaders later this month.

A key issue in the talks is likely to be the need for a coordinated plan to bolster Europe's banks to withstand a possible government bond default by Greece and how to prevent contagion that could threaten other heavily indebted eurozone nations.

Merkel spoke out in favor of a coordinated bank recapitalization earlier this week following talks with the International Monetary Fund and other European leaders.

The chancellor said that banks must first seek to raise new capital on the market before turning to their government, insisting that the eurozone's newly strengthened euro440 billion ($590 billion) bailout fund would then only serve as a backstop if a member state can't cope with shoring up its banks' capital.

France, however, has appeared to favor turning to the fund's resources right away instead of relying on a national facility to re-capitalize its banks — who are among the biggest holders of Greek bonds.

French Finance Ministry officials on Friday declined to comment on the different approaches.

Merkel and Sarkozy were set to hold a news conference after holding their first hour of talks, with a working dinner scheduled following the press conference.

German Finance Minister Wolfgang Schaeuble and his French counterpart Francois Baroin were also taking part in the discussions.

The chancellor has insisted that the Oct. 17-18 summit of European leaders in Brussels must send a clear signal on the issue in a bid to restore market confidence.

Germany and France, which together represent about half of the 17-nation currency zone's economic output, regularly hold talks before EU summits to chart out joint positions.

Schaeuble told the Sunday paper Frankfurter Allgemeine Sonntagszeitung that "there is a high risk that the crisis will grow more acute and spread further."

One of the countermeasures that therefore have to be in place, he was quoted as saying, must be "to make sure that the banks have sufficient capital."

The implosion of Belgian lender Dexia following its sizable exposure to Greek and other eurozone sovereign debt, meanwhile, has added a sense of urgency to the talks. France, Belgium and Luxembourg announced Sunday they had approved a plan for the future of the embattled bank, but they offered no details.

France and Belgium became part owners of the bank during a euro6 billion ($7.8 billion) 2008 bailout.

The IMF has said banks across the continent might need up to euro200 billion ($267 billion) in new capital. The EU disputes the IMF's estimate, but has been warning that lending between banks and from banks to businesses is threatening to freeze up.

Some analysts fear that a Greek default could cause a severe credit squeeze that would even threaten banks not exposed directly to Greece's debt because banks could be afraid to lend to each other for fear they won't get paid back.

The credit freeze following the collapse of U.S. investment bank Lehman Brothers in 2008 choked off lending to the wider economy and caused a deep recession.

Merkel insisted this week that the eurozone should not hesitate to bolster its banks if experts conclude it to be necessary, because failing to do could lead to "vastly higher damage."

Private bondholders agreed in July to take about a 20 percent cut on their holdings of Greek bonds as their participation in a second international euro109 billion bailout for the country.

However, Schaeuble on Sunday joined Merkel and other officials in hinting that the agreement might have to be renegotiated to cut Greece's debt even further to attain a sustainable level.

"It is possible that we have so far assumed an insufficient percentage of debt reduction," he was quoted as saying.