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Latest update : 2011-10-22

French President Nicolas Sarkozy and German Chancellor Angela Merkel will hold new talks Saturday in Brussels ahead of a European leadership summit Sunday as disagreement over how to utilise EU bailout funds stalls action on the debt crisis.

AFP - France and Germany were poised to make a fresh bid to forge a solution to the eurozone debt crisis Saturday following a mini breakthrough as ministers agreed to unlock much-needed aid for Greece.

President Nicolas Sarkozy and Chancellor Angela Merkel were set to hold crunch talks in Brussels on Saturday evening, paving the way for a summit of the leaders of all 27 member states a day later.

A disagreement between the eurozone's top two economies over how best to use the EU's 440-billion-euro ($611-billion) bailout fund forced the bloc to call an additional summit on Wednesday and several sticking points remain.

The next stumbling block to be tackled by European finance ministers on Saturday morning from 7:30am (0530 GMT) was how to recapitalise the continent's lenders amid concerns losses of at least 50 percent from their holdings of Greek debt could pull them into the mire.

The EU wants banks to raise their core cash reserves -- so-called "tier-1" capital -- to nine percent, but the idea of forced recapitalisation has been poorly received by the banking community.

The European Banking Authority (EBA) has estimated that between 80 and 100 billion euros is needed to restock banks' capital bases.

But this figure appears unlikely to reassure jittery markets, since the IMF has estimated that at least twice this amount is needed.

Moreover, a spat between Paris and Berlin over maximising the lending capacity of the EU's bailout fund -- the European Financial Stability Facility (EFSF) -- continued to slow progress towards a deal on the crisis.

France wants to give the fund a banking licence and allow it to borrow from the European Central Bank, giving it almost unlimited lending capacity.

However, Germany is strictly against this proposal, arguing that the EU treaties prohibit central bank lending to member states, a point reiterated by diplomats after Friday's talks.

French Finance Minister Francois Baroin sought to play down the rift after the meeting, saying: "I think we are going in the right direction, considering the different points of view."

Europe did take a small step to solving the crisis by unblocking much-needed aid to debt-wracked Greece.

Following more than seven hours of talks, eurozone ministers clinched an accord to disburse eight billion euros (11 billion dollars), the sixth tranche of a bailout package agreed in 2010 but already considered insufficient.

A source close to the talks said the head of the International Monetary Fund would recommend unlocking its 2.2-billion-euro portion, clearing the way for the cash that Athens needs to pay its public sector workers and pensions.

However, throwing another potential spanner in the works, diplomatic sources said Europe and the IMF would only proceed with their planned second Greek bailout if banks accept losses of "at least 50 percent" on their debt holdings.

Even that would require an increase of 5.0 billion euros to the original 109 billion euros in planned eurozone and IMF loans, according to a report drawn up by international auditors discussed by eurozone ministers at their Friday talks.

Nevertheless, despite mounting pressure from the United States, China and Britain to come up with a deal at least before the group of 20 leading industrial economies meet in Cannes on November 3-4, no major breakthrough is expected over the weekend.

Expressing frustration at the inability to forge a consensus, the head of the eurozone finance ministers, Jean-Claude Juncker, warned that the EU's divisions were sending "disastrous" signals to the rest of the world.

EU President Herman Van Rompuy has acknowledged that Sunday's summit is now "the first of a two-step process" that will culminate in "decision making" on Wednesday.

Date created : 2011-10-21


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