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France, Germany split over EU bailout fund

Brussels, October 21, 2011

Deep divisions between France and Germany mean they will make scant progress on strengthening the euro zone bailout fund at a summit on Sunday, in a sign that Europe's leaders are still some way from getting a grip on the bloc's debt crisis.

German Chancellor Angela Merkel and French President Nicolas Sarkozy said in a joint statement on Thursday that European leaders would discuss a global solution to the crisis on Sunday but no decisions would be adopted before a second meeting to be held by Wednesday at the latest.

The major sticking point is over how to scale up the European Financial Stability Facility (EFSF), a 440 billion euro ($600 billion) fund so far used to bail out Portugal and Ireland.

France and Germany disagree over the best way to bolster the facility, with Paris fearing its triple-A credit rating could come under threat if the wrong method is chosen.

Failure to agree on leveraging the EFSF will further damage confidence in the euro zone's ability to tackle its debt crisis after nearly two years of trying to get on top of a problem that started in Greece and now threatens Italy, Spain and even France.

Underlining the threat the euro zone crisis poses to the broader global economy, US President Barack Obama held a video conference with Merkel and Sarkozy, reiterating that he hopes a solution will be in place in time for a summit of G20 leaders in France on November3-4.

Merkel and Sarkozy 'fully understand the urgency of the issues in the euro zone and are working diligently to develop a comprehensive solution that addresses the challenge and which will be politically sustainable,' the White House said.

In their effort to agree a comprehensive resolution plan, euro zone leaders are striving to agree new steps to reduce Greece's debt, strengthen the capital of banks exposed to weak sovereign debt and leverage the EFSF to stem contagion to bigger economies.

The communique, issued after Sarkozy and Merkel spoke by telephone, said Paris and Berlin wanted negotiations to start immediately with the private sector over its contribution to a sustainable plan for Greece's mountainous debt.

The statement from the euro zone's dominant two leaders, who will meet in Brussels for talks on Saturday, suggested little progress had been made in that area either.

Despite the divisions on the EFSF, EU leaders have made headway on another critical element in tackling the crisis -- the recapitalization of European banks -- while a draft statement for Sunday's summit showed euro zone countries will make rules to limit budget deficits and public debt part of national legislation by the end of next year.

EU officials said all 27 member states had agreed that just short of 100 billion euros was required to bolster bank balance sheets, a substantial step forward in attempts to protect the system against the threat of a default in Greece or elsewhere.

'The figure has been discussed with member states. It is now acceptable for everybody,' an EU source involved in the discussions said.

Banks will be required to come up with the capital from shareholders first, and if that fails then national governments will provide the support. Only as a last resort will the EFSF be used to recapitalize institutions.

A deal on bank capital clears one hurdle ahead of Sunday, but at least three others remain -- a deal on a revised second bailout package for Greece, the extent of the private sector's involvement in that, and the EFSF's structure.

The IMF and the EU also do not see eye-to-eye over the sustainability of Greek debts, with the IMF concerned that EU projections may be too optimistic and that deeper debt reduction is needed, EU sources told Reuters.

Despite the differences of opinion, EU and IMF inspectors are expected to go ahead and approve an 8 billion euro aid payment to Greece next month, the sixth tranche from a 110 billion euro package of EU/IMF loans agreed last May.

Without that payment Greece faces default, possibly dragging the larger economies of Spain and Italy into the mire and sending shockwaves through the European banking system.

A German government spokesman said the second meeting would allow the budgetary committee of the German parliament to consider plans for the euro zone rescue fund. The committee has to consider such plans, according to German regulations.

'The president and the chancellor affirmed their complete agreement to provide a global, ambitious response to the crisis currently facing the euro zone,' the Franco-German statement said.-Reuters




Tags: France | Germany | Euro zone | split | bailout fund |

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