Nicolas Sarkozy, the French president, and Angela Merkel, the German chancellor, will meet in Berlin on Sunday to debate whether a government must empty its pockets to prop up its country's struggling banks, or if the euro region's shared rescue fund can be deployed outside a full-blown emergency. one notch to A+ from AA- and cut Spain's by two rungs, to AA- from AA+, citing a worsening of the eurozone's debt crisis. "A credible and comprehensive solution ... is politically and technically complex and will take time to put in place," it warned.A string of European banks, including the UK's Royal Bank of Scotland and Lloyds TSB, saw their credit ratings downgraded on Friday, highlighting the pressure on politicians to agree coordinated action to recapitalise the sector.
Overnight deposits at the European Central Bank (ECB) made by eurozone banks reached their highest this year for the fifth consecutive day as banks become less willing to lend to each other, a warning signal of a credit crunch.
The European Commission is expected to offer an outline of a plan to member states before the deadline of October 17, when EU leaders meet for a Brussels summit.
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Amid reports of division between the two powerhouse economies, Fitch downgraded Italy's sovereign credit rating by
The concern is that politicians disagree over how to use the eurozone's €440bn (£379bn) rescue fund, the European Financial Stability Facility (EFSF) backed by euro states - ultimately, taxpayers.
National leaders agreed in July to bolster the EFSF's powers, allowing it to recapitalise banks directly rather than via their governments.
France, unwilling to risk its own top-notch sovereign rating by pumping money into its banks, which are heavily exposed to the debt of stricken eurozone nations, is said to want to use the fund to recapitalise its banking sector. Mr Sarkozy faces a presidential election in seven months, which makes retaining the "AAA" grade even more politically sensitive.
Berlin says the shared fund should only be used as a last resort when there are no national funds left. "Only if a country cannot do this with its own means, then the EFSF can be used as an option," Ms Merkel said on Friday. A French government source played down reports of a divide.
France is also wrangling with Belgium over who should pay up to rescue the troubled Franco-Belgian bank Dexia, which is set to be the first European bank to be dragged down by the eurozone debt crisis. On Friday Standard & Poor's cut the bank's credit rating by one notch to A-, which is still "investment" grade, citing the high level of state support expected.
Dexia’s board is set to meet this weekend to study options to dismantle the French-Belgian bank, Bloomberg reported.
The European Banking Authority (EBA), was meanwhile conspicuous by its silence after two days of meetings. The watchdog is trying to estimate how much is needed to stabilise the banking sector, using tougher scenarios than its July stress tests which saw just eight banks fail.
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