The leaders of Germany and France – the eurozone’s two biggest economies – have reached an agreement about how to strengthen Europe’s shaky banking sector amid the region’s debt crisis.
“We are determined to do the necessary to ensure the recapitalisation of Europe’s banks,” German Chancellor Angela Merkel said following talks with French President Nicolas Sarkozy in Berlin on Sunday.
A “comprehensive response” to the eurozone’s debt crisis will be finalised by month’s end, including a detailed plan on recapitalising the banks, Sarkozy said.
“The economy needs secure financing to ensure growth. There is no prospering economy without stable banks,” he said. “That is what is at stake.”
However, both leaders declined to name a price tag for the new measures or elaborate further, saying the proposal must first be discussed with other European leaders.
Merkel did not provide details about how the recapitalisation would work, saying only that all banks across the eurozone would be measured by the same criteria in co-ordination with, among others, the European Banking Authority and the International Monetary Fund.
Any solution must be “sustainable”, Merkel added.
Sarkozy said the French-German accord on the proposal “is total”.
Many experts say the capital cushions of many European banks must be strengthened in order to withstand a possible government bond default by Greece.
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.
The credit freeze following the collapse of US investment bank Lehman Brothers in 2008 choked off lending to the wider economy and caused a deep recession.
Germany and France will now submit their proposal to shore up Europe’s shaky banking sector to other European Union governments ahead of an October 17-18 summit of the bloc’s 27 leaders in Brussels.
Both leaders expressed confidence that a comprehensive European response to the crisis will be finalised before a summit of the G20 most developed nations in France on November 3-4.
“The global economy needs this summit to become a success, and the European Union will do its part” to ensure a positive outcome, Merkel said.
The IMF has said banks across the continent might need up to 200 billion euros ($A280 billion) in new capital. The EU disputes the IMF’s estimate, but has warned that lending between banks and from banks to businesses is threatening to freeze up.
Earlier this week, Merkel 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 440 billion euro bailout fund would then only serve as a back-up if a member state can’t cope with shoring up its banks’ capital.
France, however, was reported to favour turning to the fund’s resources right away instead of relying on a national facility to recapitalise its banks – which are among the biggest holders of Greek bonds.
But Sarkozy sought on Sunday to dispel the notion of different approaches regarding the European Financial Stability Facility, saying “there are no disagreements”.
German Finance Minister Wolfgang Schaeuble and his French counterpart, Francois Baroin, also took part in the two leaders’ discussions.
The implosion of 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 they offered no details.
