Merkel, Sarkozy reach agreement on bank sector

By Juergen BAETZ | October 9, 2011 | 12:45 PM EDT

BERLIN (AP) — The leaders of Germany and France, the eurozone's two biggest economies, say they have reached agreement on strengthening Europe's shaky banking sector.

German Chancellor Angela Merkel says she and French President Nicolas Sarkozy "are determined to do the necessary to ensure the recapitalization of Europe's banks."

Merkel spoke after talks with Sarkozy at Berlin's chancellery Sunday aimed at forging an agreement ahead of a summit of the European Union's 27 leaders later this month.

Sarkozy said it was "not the moment" to go into the agreement's details but said that the French-German accord "is total."

When asked whether all European banks would be recapitalized, Merkel did not directly answer the question, saying only that all banks across the eurozone would be measured by the same criteria that would be established in coordination with, among others, the European Banking Authority and the International Monetary Fund.

Both leaders declined to elaborate on their proposal, saying it must first be discussed with other European leaders.

Earlier this week, Merkel spoke in favor of a coordinated bank recapitalization following talks with the International Monetary Fund and other European leaders. The chancellor said that banks must first seek to raise new capital on the market before turning to their government, insisting that the eurozone's newly strengthened euro440 billion ($590 billion) bailout fund would then only serve as a backstop if a member state can't cope with shoring up its banks' capital.

France, however, has appeared to favor turning to the fund's resources right away instead of relying on a national facility to re-capitalize its banks — who are among the biggest holders of Greek bonds.

The chancellor has insisted that the Oct. 17-18 summit of European leaders in Brussels must send a clear signal on the issue in a bid to restore market confidence.

Germany and France, which together represent about half of the 17-nation currency zone's economic output, regularly hold talks before EU summits to chart out joint positions.