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Euro Leaders Target Bank Capital in Next ‘Final’ Crisis Plan

Angela Merkel and Nicolas Sarkozy
Germany's chancellor Angela Merkel, center, and France's president Nicolas Sarkozy. Photographer: Michele Tantussi/Bloomberg

Angela Merkel and Nicolas Sarkozy turned their crisis-fighting focus to banks, promising a recapitalization blueprint this month that will overtake a 12-week-old rescue plan that has yet to be put into place.

“We will recapitalize the banks,” the French president said in Berlin yesterday at a joint briefing with the German chancellor without providing details. “We’ll do it in complete agreement with our German friends because the economy needs it, to assure growth and financing.”

Facing rising pressure to defuse turmoil that’s raged for 19 months and growing concern Greece is headed to a default, Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital. Sarkozy said they would deliver a plan by the Nov. 3 Group of 20 summit.

Searching for what each called a “durable” solution for Greece’s debt load shows they have moved beyond a July 21 plan that Luxembourg’s Jean-Claude Juncker called the “final package, of course.” Their approach may spike a debt swap now being negotiated that would impose a 21 percent write-off and suggests investors take a bigger share of the losses, reflecting the deterioration of the Greek economy.

“There is a big difficulty with respect to the Greek situation because it is looking as if the July 21 agreement just isn’t sufficient and that’s been increasingly recognized in Greece and the rest of Europe,” Julian Callow, chief European economist at Barclays Capital in London, said today on Bloomberg Television’s On the Move with Francine Lacqua.

The euro strengthened to the highest this month, adding as much as 1.5 percent to $1.3583 at 11:45 a.m. in Berlin. Standard & Poor’s 500 Index futures rose.

‘One Step Behind’

“Maybe they’re still running one step behind, but they are at least discussing the right things,” said Carsten Brzeski, an economist at ING Group in Brussels.

Underscoring the urgency, directors of Franco-Belgian Dexia SA began dismantling the lender, the first victim of the debt crisis at the core of Europe. Belgium announced early today it would pay 4 billion euros ($5.4 billion) to take over the local consumer-lending unit as part of the process.

“By the end of the month, we will have responded to the crisis issue and to the vision issue,” Sarkozy said. While the heads of Europe’s two biggest economies reiterated their intention to keep Greece in the euro region, they left it to international auditors, known as the “troika,” to guide the next steps. Sarkozy didn’t repeat the line he used 10 days ago that “we can’t let Greece fail.”

Greek Restructuring

The focus on banks signals a willingness to accept a Greek debt restructuring, an outcome Sarkozy has resisted, according to Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington.

“In the end, Merkel and the slowing euro-area economy checkmated Sarkozy and forced him to choose between standing behind Greece or his own banks,” Kirkegarrd said in an e-mail. “Unsurprisingly, he chose the latter.”

After their eighth bilateral summit in 20 months, the two leaders unveiled no new agreement on what role should be played by the bailout fund, the European Financial Stability Facility, amid reports that they differed on how to use it.

A strengthening of the EFSF was part of the July 21 package, which has yet to be ratified by all 17 euro governments as Slovakia’s ruling coalition struggles to back it.

‘Great Risk’

European leaders are bracing for the consequences of a Greek default. German Finance Minister Wolfgang Schaeuble told Frankfurter Allgemeine Sonntagszeitung that euro governments may have come up short on the scale of Greek debt writedowns when they reached the agreement in July. He cited a “great risk” that the crisis could spread further.

European banks need as much as 200 billion euros of capital, Antonio Borges, the International Monetary Fund’s European department head, said last week.

Merkel said a report from a team of inspectors from the IMF, the European Union and the European Central Bank later this month will help determine the next step to keep Greece in the 17-nation euro zone.

“On Greece, we are waiting for the troika report,” Sarkozy said. “Here, too, we are on the same line: we will take the appropriate decisions.”

The Greek debt load will climb to 172.7 percent of gross domestic product in 2012 -- about double Germany’s -- as the economy contracts for a fifth year, the Finance Ministry said.

“The decision for a single currency was a path-breaking decision and therefore we’ll defend it with all possible strength,” Merkel said alongside Sarkozy. Sarkozy repeated several times that the two leaders agreed “on everything.”

“The typical German-French experience over the last 20 months is that almost every time they really had to agree when time was running out, they agree,” said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London.

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