France and Germany agree plan to recapitalise European banks.

Angela Merkel and Nicolas Sarkozy draw up package to counter debt crisis but will not reveal details before G20 summit

By guardian.

French President Nicolas Sarkozy and German chancellor Angela Merkel after meeting in Berlin to discuss how to confront the eurozone bank and debt crisis.
Photograph: Martin Meissner/AP

The leaders of France and Germany have announced that they are ready to recapitalise Europe’s troubled banks and have reached agreement on a “long-lasting, complete package” to counter the bloc’s debt crisis.

But the German chancellor, Angela Merkel, and Nicolas Sarkozy, the French president, refused to go into detail about the plans, saying they had to think of the markets and iron out “technical issues” before consulting the other 25 leaders in the European Union.

The announcement came hours after the governments of France, Belgium and Luxembourg said they had approved a plan for the future of the embattled Franco-Belgian bank Dexia.

“We are determined to do whatever necessary to secure the recapitalisation of our banks,” Merkel said at a joint news conference with Sarkozy at the chancellery in Berlin on Sunday evening. “A sound credit supply is the basis of sound economic development,” she added.

Both leaders were tight-lipped on whether they had decided that the €440bn (£380bn) bailout fund, the European financial stability facility (EFSF), could be used to recapitalise banks – a position known to be favoured by the French – or whether it could only be used as a last-ditch resort if a member state could not cope with shoring up its banks’ capital on its own.

The latter is known to be Merkel’s preference, but on Sunday the chancellor would only say: “Germany and France want the same criteria to be applied, and criteria that are accepted by all sides.”

Merkel added: “We are not going into details today,” adding that the duo would present a “complete package” for stabilising the eurozone at the end of the month in time for the G20 summit in Cannes on 3-4 November. “This summit has to be a success for the sake of the global economy,” she stressed.

Sarkozy said he was of the “unshakeable belief” that all 17 eurozone countries would soon ratify the controversial bill to expand the EFSF’s capabilities – despite widespread fears that political infighting could mean that it would not pass in Slovakia, which is expected to be the last parliament to vote on the measuresthis Tuesday . He too would not elaborate on his agreement with Merkel, saying only that there were “technical issues” to resolve before it was made public, and that releasing information prematurely could affect the markets.

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.

While Merkel and Sarkozy refused to reveal exactly what lies ahead, German media was reporting that eurozone officials are planning for a scenario in which investors would take a haircut of up to 60% on Greek bonds.

Merkel had been put under extra pressure to reach a speedy solution after coming under attack from the US for damaging dawdling. The World Bank president, Robert Zoellick, told a German magazine last week that there was a “total lack” of vision in Europe and Germany in particular needed to show more leadership.

The German chancellor knows the stakes are high and time is short. Her finance minister, Wolfgang Schäuble, told the Sunday paper Frankfurter Allgemeine Sonntagszeitung that “there is a high risk that the crisis will grow more acute and spread further”. One countermeasure that therefore has to be in place, he was quoted as saying, must be “to make sure that the banks have sufficient capital”.

The International Monetary Fund has said banks across the continent might need up to €200bn ($267bn) in new capital. The European Union disputes the IMF’s estimate but has been warning that lending between banks and from banks to businesses is threatening to freeze up.

The implosion of the Franco-Belgian lender Dexia following its sizable exposure to Greek and other eurozone sovereign debt, meanwhile, added a sense of urgency to the talks. France, Belgium and Luxembourg announced on Sunday they had approved a plan for the future of the embattled bank but offered no details. France and Belgium became part owners of the bank during a €6bn bailout in 2008.

After Dexia’s shares plunged last week amid fears it could go bankrupt, the French and Belgian governments stepped in and guaranteed its financing and deposits. The bank said in a statement on Friday that trading in its shares would remain frozen until it could “communicate more precisely on the various choices and options concerning the future of the group”.

The bank has significant exposure to Greek debt, and there are fears Greece may default in some fashion.

Finding a solution is particularly urgent for Belgium because Moody’s Investors Service placed the country’s Aa1 rating on review for a possible downgrade on Friday, due in part to the expected expense of guaranteeing that Dexia’s depositors will lose no money.
What’s the plan?

• Kick the can down the road Merkel has consistently said she wants to wait until the establishment of a new euro bailout scheme in 2013 – the so-called European stability mechanism – before a lasting solution can be reached. So option one will be to maintain this conservative course and hope for the best until she has had more time to soften up the German public for another handout to the southern Europeans. Likelihood: 1/5

• Fix the banks The past week has seen the crisis focus on Europe’s banks, so Merkel and Sarkozy may have agreed a plan to recapitalise the sector. Stress tests in the summer were exposed as a failure after Franco-Belgian bank Dexia – which passed – went bust and dozens of others were downgraded. A possible €200bn (£172bn) pan-eurozone bailout has been suggested to help banks absorb losses from an orderly Greek default, enabling them to rebuild and move on. Likelihood: 4/5

• Shock and awe The US and UK have urged the eurozone to zap the problem with a huge expansion of the bailout fund – the European financial stability facility – to €2tn or €3tn from its current €440bn. This financial equivalent of a military shock and awe strategy would reassure the markets, throw a firewall around the weaker euro countries and ensure that the Greek contagion does not spread to Italy and Spain. Likelihood: 2/5

Martin Farrer

http://www.guardian.co.uk/business/2011/oct/09/france-germany-agree-plan-banks?CMP=twt_gu