Sarkozy, Merkel: Plan Soon to Recapitalize Banks

Banks will be recapitalized “because economy needs it”; Spain, Italy ratings cut

After a weekend meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel, the two emerged with the announcement that they would proceed with devising a plan this month to recapitalize banks in the euro zone, with the 17-nation currency bloc embroiled in the possibility of a looming default by Greece. The debt crisis escalated, meanwhile, as Fitch Ratings cut both Spain and Italy, and Moody’s put Belgium on review for possible downgrade as well.

Bloomberg reported that both leaders have been at the forefront of discussions over how to handle Greek debt, since a deal brokered in July for a second rescue packages for the beleaguered Mediterranean country appears now to be inadequate after Greece failed in September to meet targets set to bring down its debt. While France has taken the position that default must be avoided at all costs, to avoid a potential breakup of the euro, Germany has pushed, at taxpayer insistence, on a larger haircut for investors. Worries over the latter have driven bank stocks down.

Sarkozy said in the report, after this latest meeting concluded, “We will recapitalize the banks. We’ll do it in complete agreement with our German friends because the economy needs it, to assure growth and financing.” He provided no specifics on how that was to be done, but promised that he and Merkel would present a plan by November 3, the date set for the next G20 meeting. He also did not repeat his determination that Greece would not be allowed to fail.

Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, was quoted saying, “In the end, Merkel and the slowing euro-area economy checkmated Sarkozy and forced him to choose between standing behind Greece or his own banks. Unsurprisingly, he chose the latter.”

Fitch Ratings, meanwhile, cut Italy’s credit rating to A+ from AA-, and Spain’s to AA- from AA+, both with negative outlooks. The action was taken Friday after markets closed. Also, Moody’s Investors Service placed Belgium on review for a possible downgrade. According to Nikolaos Panigirtzoglou, a global-markets strategist at JPMorgan Chase & Co. in London, quoted in the report, Italy’s downgrade means its bonds are no longer be eligible to be included in the liquidity asset buffer required by the U.K. Financial Services Authority.

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