Merkel, Sarkozy tackle differences over euro crisis (Reuters)

BERLIN (Reuters) – German Chancellor Angela Merkel will thrash out differences with French President Nicolas Sarkozy on Sunday over how to use the euro zone's financial firepower to counter a sovereign debt crisis threatening the global economy.

With the turmoil threatening to spiral into financial meltdown as the value of banks' sovereign bond holdings slide, Merkel and Sarkozy are likely to discuss in Berlin both how to manage Greece, prevent contagion and strengthen lenders.

The implosion of Belgian lender Dexia, the first victim of the crisis, has added a sense of urgency to the talks. The prime ministers of France and Belgium and the finance minister of Luxembourg agreed a rescue plan for Dexia on Sunday ahead of the stricken Franco-Belgian bank.

"Dexia will be among the topics that will be discussed but the main topic is Greece and the euro zone, as banks are only a consequence" of the crisis, a source at the French finance ministry told Reuters.

Sarkozy is due to arrive in Berlin late on Sunday afternoon and hold a meeting with Merkel followed by a working dinner. A news conference will take place at 1530 GMT.

Talks are continuing over a vital aid tranche for Greece, which could run out of cash as soon as mid-November. European finance ministers are considering making banks take bigger losses on Greek debt -- an issue that could be discussed at the Merkel-Sarkozy meeting.

"It is possible that we assumed in July a level of debt reduction that was too low," German Finance Minister Wolfgang Schaeuble was cited as saying by a newspaper on Sunday.

Separately, European Commission head Jose Manuel Barroso told Bild a Greek default would have unforeseeable consequences and may cause the crisis to spread.

"This is new territory for us and we are discussing solutions which have not really been tested before," he said.

BOLSTERING BANKS

Germany and France have so far been split over how to recapitalize Europe's banks, which Ireland estimated on Saturday may need more than 100 billion euros ($135 billion) to withstand the sovereign debt crisis, while the International Monetary Fund (IMF) has said the banks need 200 billion in additional funds.

Paris wants to tap the euro zone's 440 billion European Financial Stability Facility (EFSF) to recapitalize its own banks, while Berlin is insisting the fund should be used as a last resort.

Qatar is being cited by some media as a potential savior for European banks yet analysts believe tiny Gulf Arab state is an unlikely white knight, as Europe's needs are too great.

Top French banks BNP Paribas and Societe Generale denied a report on Sunday that they could seek to raise a combined 11 billion euros as part of a broader European bank recapitalization plan.

Another key dispute is how to use the EFSF to buy sovereign debt to prevent contagion of the crisis, particularly crucial if Greece fails to secure its next aid tranche.

France does not want to set guidelines for the EFSF on the matter, whereas Germany wants to limit the sum used for each member state and set a time limit for bond purchasing.

"Given that the EFSF is limited overall, it makes sense also to limit the purchases on the secondary market for each country," Michael Meister, deputy parliamentary leader of Merkel's conservatives, told Reuters.

There was a danger, otherwise, the funds could be quickly used up, he said.

Berlin could be prepared to allow a more flexible use of the EFSF to prop up states and banks if Paris agrees to a broad haircut on Greek debt, a German paper wrote on Sunday.

But a government source told Reuters: "There is no such agreement." Furthermore, Merkel warned last Tuesday that the threat of contagion from a euro zone country rescheduling its debt would be huge, and it only made sense once it had achieved a primary surplus again.

The two euro zone heavyweights have come under pressure worldwide to resolve Europe's crisis which is roiling markets. U.S. President Barack Obama on Thursday urged Europe to "act fast," calling the common currency bloc's crisis the largest obstacle to the United States' own recovery.

World Bank President Robert Zoellick told Wirtschaftswoche magazine there was a "total lack" of vision in Europe and Germany in particular needed to show more leadership.

Merkel will visit Vietnam and Mongolia this coming week.

(Additional reporting by Andreas Rinke in Berlin, Regan Doherty in Doha and Christian Plumb and Lionel Laurent in Paris, Editing by Hans-Juergen Peters)

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Merkel, Sarkozy reach agreement on bank sector (AP)

BERLIN – The leaders of Germany and France, the eurozone's two biggest economies, say they have reached agreement on strengthening Europe's shaky banking sector.

German Chancellor Angela Merkel says she and French President Nicolas Sarkozy "are determined to do the necessary to ensure the recapitalization of Europe's banks."

Merkel spoke after talks with Sarkozy at Berlin's chancellery Sunday aimed at forging an agreement ahead of a summit of the European Union's 27 leaders later this month.

Sarkozy said it was "not the moment" to go into the agreement's details but said that the French-German accord "is total."

When asked whether all European banks would be recapitalized, Merkel did not directly answer the question, saying only that all banks across the eurozone would be measured by the same criteria that would be established in coordination with, among others, the European Banking Authority and the International Monetary Fund.

Both leaders declined to elaborate on their proposal, saying it must first be discussed with other European leaders.

Earlier this week, Merkel spoke in favor of a coordinated bank recapitalization following talks with the International Monetary Fund and other European leaders. The chancellor 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 euro440 billion ($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, has appeared to favor turning to the fund's resources right away instead of relying on a national facility to re-capitalize its banks — who are among the biggest holders of Greek bonds.

The chancellor has insisted that the Oct. 17-18 summit of European leaders in Brussels must send a clear signal on the issue in a bid to restore market confidence.

Germany and France, which together represent about half of the 17-nation currency zone's economic output, regularly hold talks before EU summits to chart out joint positions.

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