Banking concerns

European Union finance ministers have agreed to take steps to protect the bloc's banking sector after Brussels and Paris were forced to step in to bail out a Franco-Belgian lender.

The fears of a European banking crisis have also been stoked by growing concerns about the possibility of a Greek default, particularly after a delay in approving the latest 8-billion-euro ($10.6-billion) tranche of an EU-International Monetary Fund bailout, without which Athens could find itself unable to pay its bills as soon as next month.

This led EU finance ministers, who until now had rejected the idea of any coordinated bank recapitalization, to reassess their view.

"There is an increasingly shared view that we need a concerted, coordinated approach in Europe while many of the elements are done in the member states," the EU's Economic Affairs Commissioner Olli Rehn told the Financial Times following a two-day meeting of EU finance ministers in Brussels. "There is a sense of urgency among ministers and we need to move on," he said.

German Finance Minister Wolfgang Schäuble said that there was a consensus that the biggest concern at the moment was that the problems on the financial markets could "escalate into a banking crisis."

Schäuble said the ministers had agreed to report back on the situations in their own banking sectors at their next monthly meeting in November and plot a strategy for protecting them.

Earlier on Tuesday, Belgium and France moved to provide guarantees to depositors and creditors of the Franco-Belgian Dexia bank, which had been battered on the stock markets due to concerns about its exposure to Greek debt. At one point on Tuesday, the bank had lost 37 percent of its value on the markets.

Italy downgraded - again

Investor sentiment also wasn't helped by a couple of moves by one of the three major credit ratings agencies. Moody's downgraded Italy's credit rating from Aa2 to A2 with a negative outlook due to risks associated with the financing of the country's long-term and sluggish economic growth. This followed a similar downgrade of Italy by Standard and Poor's in September.

Perhaps more damaging though was a separate report in which Moody's expressed skepticism about the ability of eurozone government to reduce their deficits.

"There has been a profound loss of confidence in certain European sovereign debt markets, and Moody's considers that this extremely weak market sentiment will likely persist," the report said. "It is no longer a temporary problem that might be addressed through liquidity support, and several euro-area governments are increasingly affected by the loss of confidence."

However, the consensus on the need to take coordinated action to shore up Europe's banking sector, coupled with the French and Belgian guarantees for Dexia, were rewarded by investors in early trading on Wednesday.

Frankfurt's DAX climbed by three percent, while the CAC 40 in Paris and London's FTSE 100 were up by over two percent in trading on Wednesday afternoon. Dexia also rebounded somewhat after major losses earlier in the week, gaining about seven percent.

Six-pack approved

Before wrapping up their two days of talks in Luxembourg, the finance ministers also approved a set of stricter EU budgetary rules designed to prevent another sovereign debt crisis. The regulations, which have been dubbed the "six pack" will make it easier for the bloc to impose financial penalties on eurozone countries that breach the Stability and Growth Pact's debt-limit ceiling of three percent of gross domestic product.

They did not, however, commit on whether Greece would be paid the latest installment of its bailout. Inspectors from the so-called "troika" of the EU, IMF and the European Central Bank were examining Greece's books to determine whether it had done enough to reduce its deficit.

Greek public sector strike

The Greek government's efforts to reduce its deficit include a plan to effectively dismiss almost 30,000 civil servants. This prompted the country's largest public sector trade union to call a 24-hour strike for this Wednesday to protest against the government's austerity measures. Public transport and flights in and out of Greece have been severely disrupted. Schools, courts and other public institutions have been shut down, while hospitals were running on emergency staffing.

Efforts to rein in Europe's sovereign debt crisis continue, with German Chancellor Angela Merkel traveling to Brussels to meet with European Commission President Jose Manuel Barosso and other senior officials.

Author: Chuck Penfold, Mark Hallam (Reuters, AFP, dpa)
Editor: Nancy Isenson