Banking crisis
October 9, 2011
German Chancellor Angela Merkel and French President Nicolas Sarkozy, the leaders of the eurozone's most powerful economies, are meeting in the German capital on Sunday to thrash out differences over how to use Europe's newly approved financial tools to fix the bloc's broken financial system.
With the turmoil of the ongoing debt crisis threatening to spiral into eurozone-wide financial meltdown, Merkel and Sarkozy will be focusing on how to deal with Greece, how to prevent contagion from spreading to the rest of Europe, and how to recapitalize overexposed banks that have taken a recent beating on financial markets.
Divergence on recapitalization
French banks are seen as particularly overexposed to Greek, Italian and Spanish debt. Sarkozy is looking to prevent any new, bigger reduction of Greece's debt triggering a banking crisis reminiscent of 2008, which set off a global recession.
A planned 21-percent haircut, or reduction, in value of the debt European banks hold in exchange for lowering Athens' debilitating repayments - which was agreed in July - could be insufficient, said German Finance Minister Wolfgang Schäuble.
"We must ensure that the banks have sufficient capital" to face any increase in the reduction of Greece's debt, Sunday's Frankfurter Allgemeine Zeitung quoted Schäuble as saying.
Dexia crisis meeting
Meanwhille, troubled Franco-Belgian bank Dexia appears to be closer to finding a way to stay afloat. The governments of France, Belgium and Luxembourg said on Sunday that they had reached a deal on the breakup of the bank, without giving any more details.
The bank is holding a board meeting on Sunday to discuss the proposals.
Berlin has made it clear that it wants overexposed banks, such as Dexia, to first turn to private investors for funds before asking for national or European cash to solve their fiscal problems.
Merkel was explicit on Friday in saying that Europe's newly approved rescue fund, the 440-billion-euro ($590 billion) European Financial Stability Facility (EFSF), could be used only as a last resort, "if a country cannot provide help with its own means."
France, meanwhile, fearful of losing its top-notch AAA credit rating, would rather dip into European funds than its own coffers to shore up its banks.
Plans in the making
The French government has denied any differences with Germany, however, and has renewed calls for a coordinated approach among eurozone members to replenish the banks, a task the International Monetary Fund thinks will cost some 200 billion euros.
A report in German weekly 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.
Merkel has faced strong criticism within the eurozone for her handling of the crisis, which has been described as hesitant and reactive. She is facing calls to take decisive action to prevent contagion to Europe's most vulnerable economies.
World Bank chief Robert Zoellick, for one, told German business weekly Wirtschaftswoche that Berlin had shown a "total lack" of leadership. "The longer it lasts, the more money it will cost and the fewer options for action there will be," he said in an interview to be published Monday.
Time is running out for European leaders. The EU's executive, the European Commission, has given member states 10 days to hash out its recapitalization plan.
Author: Gabriel Borrud (dpa, Reuters, AFP)
Editor: Ben Knight