Those hoping last week’s rally will carry through into this week will be somewhat disappointed that plans for a massive recapitalisation of the fragile European banking sector remain extremely hazy.

Overnight, German chancellor Angela Merkel and French president Nicolas Sarkozy were at pains to stress they were in complete agreement on what needed to be done to stem the worsening debt crisis. But they declined to spell out the exact nature of their plans.

“It’s not the moment to go into details of all questions,” Sarkozy explained.

Merkel said that Berlin and Paris were determined to do whatever was necessary to recapitalise the banks to make sure that they continued to lend. Sarkozy added there was “complete agreement” between the two countries on that subject, despite reports of differences in the media.

The French president even set a deadline for resolving the region’s debt crisis, saying: “Europe must have solved its problems by the next G20 meeting.” The meeting is scheduled to be held in early November in Cannes.

But there are conflicting reports about what the bank recapitalisation plan will entail, with some suggesting that European banks will be required boost the amount of capital they must hold to 10% of their assets, from 8% at present.

On Saturday, German newspaper Frankfurter Allgemeine Zeitung quoted financial sources as saying the big French banks were ready to accept an capital injection of €10 billion to €15 billion ($US13.4 billion to $US20.1 billion) from the French government on condition that the German bank Deutsche Bank also agrees to boost its capital.

What’s more, France and Germany still appear to be at odds over how best to recapitalise the banks.

Sarkozy, who is anxious to preserve France’s precious triple-A rating, wants to use the eurozone’s €440 billion bailout fund to recapitalise the banks. But Merkel insists that banks should first attempt to get capital from shareholders, and then from their national governments. Only as a last resort should banks be allowed to tap the bailout fund.

The latest indication that Berlin and Paris lack a clear strategy for rescuing the fragile European banking sector is likely to weigh heavily on market sentiment.

The long-running eurozone debt crisis is putting severe strains on the banks, many of which have relatively low levels of capital. According to the IMF, the European banks need about €200 billion in extra capital to cover their potential losses that stem from their heavy exposures to the debt-laden eurozone countries.

*This article was originally published on Business Spectator

Peter Fray

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