Germany, France reach agreement on Europe's banks

German Chancellor Angela Merkel and French President Nicolas Sarkozy shake hands Sunday in Berlin after discussing stabilizing the euro and Europe’s banking system.

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German Chancellor Angela Merkel and French President Nicolas Sarkozy shake hands Sunday in Berlin after discussing stabilizing the euro and Europe’s banking system.

BERLIN — The leaders of Germany and France, the eurozone's two biggest economies, said Sunday they 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 recapitalization of Europe's banks," German Chancellor Angela Merkel said after talks with French President Nicolas Sarkozy in Berlin.

A "comprehensive response" to the eurozone's debt crisis will be finalized by month's end, including a detailed plan on recapitalizing the banks, Sarkozy said at Berlin's chancellery.

"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.

Analysts have urged the eurozone to identify all the banks in the region that need to replenish their capital reserves, then decide whether to compel them to raise that money on the open markets and to provide government financing to the ones that can't.

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

Merkel did not provide details Sunday about how the recapitalization would work, saying only that all banks across the eurozone would be measured by the same criteria in coordination 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."

Germany and France will now submit their proposal to shore up Europe's shaky banking sector to other European Union governments ahead of an Oct. 17-18 summit of the bloc's 27 leaders in Brussels, they said.

Both leaders expressed confidence that a comprehensive European response to the crisis will be finalized before a summit of the G-20 most developed nations in France Nov. 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 said banks across the continent might need up to $267 billion in new capital. The EU disputes the IMF's estimate, but 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 governments, insisting that the eurozone's newly strengthened $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, was reported to favor turning to the fund's resources right away instead of relying on a national facility to recapitalize its banks — which are among the biggest holders of Greek bonds.

But Sarkozy on Sunday said "there are no disagreements."

Germany, France reach agreement on Europe's banks 10/09/11 [Last modified: Monday, October 10, 2011 9:56am]

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