Leaders of Germany and France, the eurozone’s two biggest economies, said they have reached an agreement about how to strengthen Europe’s shaky banking sector amid the region’s debt crisis.
“We are determined to do the necessary to ensure the recapitalisation of Europe’s banks,” the German Chancellor, Ms Angela Merkel, said yesterday following talks with the French President, Mr Nicolas Sarkozy, in Berlin.
A “comprehensive response” to the eurozone’s debt crisis will be finalised by month-end, including a detailed plan on recapitalising the banks, Mr Sarkozy said at Berlin’s chancellery.
“The economy needs secure financing to ensure growth. There is no prospering economy without stable banks,” he said.
“That is what is at stake.”
However, both the leaders declined to name a price tag for the new measures or elaborate further, saying that the proposal must first be discussed with other European leaders.
Analysts have urged the eurozone to identify all the banks in the region that need to replenish their capital reserves, then decide whether to compel them to raise that money in the open markets and to provide government financing to the ones that can’t.
Many experts say the capital cushions of many European banks must be strengthened to withstand a possible government bond default by Greece.
Some analysts fear that a Greek default could cause a severe credit squeeze that would even threaten banks not exposed directly to Greece’s debt because banks could be afraid to lend to each other.