France and Germany will make a high-stakes attempt to settle their differences over who pays for a multi-billion pound rescue of eurozone banks on Sunday, with the French pushing for help from the eurozone’s emergency fund.
By Emma Rowley
7:31PM BST 08 Oct 2011
Nicolas Sarkozy, the French president, and Angela Merkel, the German Chancellor, will meet to plan how to protect Europe’s banks against the backdrop of the expected break-up of the Franco-Belgian bank Dexia, the first to fall prey to the present eurozone’s debt crisis.
The leaders of the euro region’s two powerhouse nations will attempt to thrash out their differences with reports suggesting that France wants to access the region’s rescue fund to help its own banks in the face of German opposition.
The rescue of Dexia by France and Belgium has piled pressure on politicians to take coordinated action to shore up the eurozone’s banking sector.
On Saturday, Mohamed El-Erian, co-chief investment officer of Pimco, warned the “haircut”, or loss, faced by banks and other holders of Greece government debt would have to be “much bigger” than the agreed 21pc.
France and Belgium, which are already Dexia shareholders after its 2008 bail-out, this week pledged to guarantee the financing of the stricken bank, whose problems relate to its holdings of the debt of struggling eurozone sovereigns.
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The two countries were yesterday discussing how to split responsibility for a “bad bank” to hold its troubled assets. The Belgian state wants to buy the bank’s Belgian retail arm, according to the union involved.
The bank’s board is set to meet on Sunday to discuss plans.
“Dexia’s funeral will be announced on Sunday,” a source told Reuters.
Bank rescues put further strain on European governments’ own finances. Moody’s said late on Friday that Belgian support for the failing bank puts its credit rating on a “negative ” watch.
The agency said it had placed Belgium’s “Aa1″ government bond ratings, one notch below the prized “Aaa” status, on review for a possible downgrade. It cited the uncertainty surrounding the impact on the government’s “already pressured balance sheet” from the extra bank support measures.
France’s keenness to protect its own top-notch credit rating is said to be the reason it has been pushing for access to the eurozone’s €440bn (£379bn) rescue fund, the European Financial Stability Facility (EFSF), to shore up its own banking sector rather than rely on its own funds.
The EFSF, which was used in the rescues of Ireland and Portugal, should soon be able to funnel money to banks in member states that are not involved in bail-outs – although Slovakia’s coalition government was last night in deadlock over ratifying the beefed-up powers.
The concern about France gaining direct access is that if one of the strongest members of the eurozone was able to use the EFSF to support its banks, the move would open the floodgates for the whole eurozone to follow.
Germany has said that the fund should only be accessed when national resources are exhausted.
Markets are keen for Merkel and Sarkozy to reach agreement before EU leaders meet in Brussels on October 17 and 18 when it is hoped that a deal can be thrashed out.
Mr Sarkozy met Christine Lagarde, the head of the International Monetary Fund, yesterday for talks in Paris on the crisis. The IMF has estimated that Europe’s lenders need up to €200bn to cover the potential losses related to the risky government debt they hold.
Panagiotis Roumeliotis, Greece’s representative at the IMF, yesterday said Athens either needs more money than the €109bn loan agreed in June, its second bail-out, or holders of the debt will have to pick up the tab.