Germany is said to support a move by the European Banking Authority to raise minimum capitalisation levels, a change that would lead to a need for financial support for banks with exposure to Greek or other sovereign debt risk. Mrs Merkel’s comments came as European Union finance ministers asked the European Banking Authority, Europe’s leading bank regulator, to test the strength of banks based on a large writedown of Greek sovereign debt, something many investors have called for. On Tuesday, the International Monetary Fund (IMF) had urged radical changes in the way the eurozone debt crisis was being handled and called for a €100bn to €200bn recapitalisation of European banks. Germany's intervention soothed markets but will intensify pressure on France. France, with banks that are among the most exposed, including its stake in Dexia, is opposed to recapitalisation. Nicolas Sarkozy, the French president, is concerned that the huge sums he might have to pay out could threaten the French AAA sovereign debt rating ahead of elections next year. Mrs Merkel dismissed suggestions that Greece could leave the eurozone and called on the last remaining national parliaments, in Holland, Malta and Slovakia, to approve measures allowing the €440bn European Financial Stability Facility (EFSF) to recapitalise banks and to buy bonds The EU and US are infected with uncontrollable spending, which is, clearly, the only thing that supports our Nanny State governments. We cannot grow out of this mess because government is too big and consumes too much of the economic energy in any state. Germany are still playing for time. This talk is just enough to keep the gravy train for Germany's exporter going with a shaky devalued euro. Germany still enjoys its economic miracle whilst presently inflicting pain on southern europe, Merkle's talk is that, all talk, Germany will not put up any real money.Time for Germay, Finland, Austria, Netherlands, Luxumburg and perhaps france to leave the Euro.
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Eurozone could agree action plan for struggling banks within a fortnight, said the German chancellor Angela Merkel after meeting EC president José Manuel Barroso on 5 October 2011. Photograph: John Thys/Getty Images
Shares rose strongly in London, Paris and Frankfurt on Wednesday amid hopes that the crisis that engulfed the Franco-Belgian bank Dexia will lead to swift action to prop up struggling European banks.
Bourses shrugged off the recent pessimism caused by fears that a looming Greek default would lead to heavy losses at Europe's leading financial institutions, reversing losses seen earlier in the week.
Germany's Dax rose by 4.5% to 5,461 following comments by the country's chancellor, Angela Merkel, that a co-ordinated plan to recapitalise European banks could be in place within two weeks. France's main stock market barometer, the CAC 40, was up 3.4% at 2,948, while London's closed more almost 158 points higher at 5102.17, a jump of 3.2% on the day.
Merkel said after talks with José Manuel Barroso, the European commission president, that a plan could be adopted at the EU and eurozone summits planned for 17 and 18 October respectively.
"Germany is prepared to move towards recapitalisation [of its banks]," she said. "We need criteria. We are under pressure of time and need to take this decision quickly."
It emerged that the three-pronged German approach envisages banks raising fresh capital on their own. If they cannot, then national governments will step in and, finally, the European financial stability facility (EFSF), the bailout fund, will become involved.
EU officials also indicated that they plan to ask the European Banking Authority to conduct new tests on the sector, to see how much fresh capital each bank would need if Greece's government debt were written down. They denied that this meant a Greek default was imminent.
Michael Derks, chief strategist at FxPro, said: "International leaders have been pleading with European leaders for weeks to resolve this issue – finally, it seems to be getting through."
With Dexia teetering on the brink of collapse, the International Monetary Fund said it was vital that Europe gave itself extra fire power and new tools to deal with a sovereign debt crisis that has intensified and spread since first emerging in Greece almost two years ago.
Antonio Borges, the head of the IMF's European department, said in Brussels: "We have to restore confidence quickly. The best way to do that is to have a capital increase rather quickly."
After originally saying that the Fund could buy bonds to prevent the crisis spreading to Italy and Spain, Borges later backtracked, arguing that the IMF could only lend directly to countries and was unable to intervene in financial markets.
French banks, but ... the problem is very widespread," he said. "No banking sector in the world can sustain a generalised loss of confidence and we need to restore that confidence all over Europe."
George Osborne, the chancellor, joined forces with his German counterpart, Wolfgang Schäuble, in Luxembourg this week in calling for the eurozone to set up "backstops" against possible defaults and for the EFSF's firepower to be increased substantially.
Meanwhile, officials close to Olli Rehn, the EU economic and monetary affairs commissioner, refused to endorse IMF suggestions that Europe's banks need €100bn-€200bn in new capital.
They admitted the situation had dramatically worsened since July, when banking stress tests showed only a handful in need of capital. But, referring to the post-Lehmans collapse, they insisted: "We are not at the 2008 stage."
The rally in European shares came as fresh economic data suggested the eurozone was sliding into recession. Retail sales across the zone dropped by 0.3% in August, while the monthly health check of its service sector pointed to the first contraction in more than two years.
"It looks as if the European debt crisis has now also infected the consumer," said Peter Vanden Houte of ING bank. "With employment perspectives deteriorating, fiscal restraint setting in and confidence shaken by dwindling stock markets, there is little hope to see any swift pick-up in consumption. If anything, consumer confidence for September seems to indicate a further fall in sales.
"We now think that the eurozone economy has entered a recession in the third quarter of 2011 and there is little improvement to be expected as long as European politicians do not get their act together in the resolution of the sovereign debt crisis."
German Chancellor Angela Merkel said that Europe’s rescue fund will only be used as a last resort to save banks and that investors may have to take deeper losses as part of a Greek rescue.
Merkel’s comments, her most explicit on banks’ role in fighting the debt crisis since the spillover from Greece began to threaten France and Italy, followed talks with European Commission President Jose Barroso in Brussels. Financial shares rose yesterday amid speculation that euro-area policy makers are working on plans to boost bank capital to contain the crisis.
“Time is running out” to establish if recapitalization is necessary, Merkel told reporters. Troubled banks need to first seek capital on their own and national governments will help if that’s not possible, she said.
“If a country cannot do it using its own resources and the stability of the euro as a whole is put at risk because the country has difficulties, then there’s the possibility of using the EFSF,” the European Financial Stability Facility, she said. Using the rescue fund is “always tied to a certain conditionality.”
Signals that European politicians may step up efforts to aid banks and push investors to accept bigger losses as part of a Greek bailout reflect international pressure to end the debt crisis and domestic opposition to expanding rescues. Moody’s Investors Service followed its three-level downgrade of Italy on Oct. 4 by warning that euro-area nations rated below the top Aaa level may see their rankings cut.
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