BERLIN // The leaders of Germany and France, the euro zone's two biggest economies, said last night that they have reached agreement on strengthening Europe's shaky banking sector.
The German chancellor, Angela Merkel, said she and the French president, Nicolas Sarkozy, were determined to do whatever was necessary to keep Europe's banks afloat.
Ms Merkel spoke after talks with Mr Sarkozy at Berlin's chancellery yesterday aimed at forging an agreement ahead of a summit of the European Union's 27 leaders later this month.
Mr 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 recapitalised, Ms Merkel did not directly answer, saying only that all banks across the euro zone 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 (IMF).
Both leaders declined to elaborate on their proposal, saying it must first be discussed with other European leaders.
Earlier this week, Ms Merkel spoke in favour of a coordinated bank recapitalisation following talks with the IMF 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 euro zone's newly strengthened €440 billion (Dh2.17 trillion) bailout fund would then serve only as a backstop if a member state cannot cope with shoring up its banks' capital.
But France has appeared to favour turning to the fund's resources right away instead of relying on a national facility to recapitalise its banks, which are among the biggest holders of Greek bonds.
The chancellor has insisted that the October 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.
Meanwhile, Belgium received approval from France to buy as much as 100 per cent of Dexia SA's Belgian consumer bank as part of proposals to dismantle the French-Belgian lender, three people with knowledge of the talks said.
The price of the Belgian bank is under discussion at a meeting of Dexia's board of directors in Brussels, said the sources, who declined to be identified.
Belgium and France may also have agreed that they will guarantee 60 per cent and 40 per cent, respectively, of the refinancing of about €120 billion of bonds and loans held by Paris and Brussels-based Dexia, two people said.
Proceeds from the sale of Dexia's profitable units will go to mitigate losses of what will be left of Dexia, which will form a bad bank, two of the people said.
"The suggested solution, which is also the result of intense consultations with all partners involved, will be submitted to Dexia's board of directors for approval," the Belgian prime minister, Yves Leterme, and the French prime minister, Francois Fillon, said in a joint statement yesterday. Details were not disclosed.
Rescuing Dexia, the first victim of the debt crisis at the core of Europe, has become critical to preventing contagion in the region's banking industry.
Dexia's balance sheet, with total assets of about €518 billion at the end of June, is about the size of the entire banking system in Greece and larger than the combined assets of financial institutions bailed out in Ireland in the past two-and-a-half years. While France and Belgium rushed to protect their local units, they wrestled over responsibility for assets hit by the crisis that caused the bank's short-term funding to evaporate.
* Associated Press with additional reporting by Bloomberg News