Germany and France Pledge Bank Recapitalization

German Chancellor Angela Merkel and French President Nicolas Sarkozy have both pledged to have a plan in place within a month to recapitalize European banks, replacing a 12-week-old rescue plan that has yet to be implemented.

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“We will recapitalize the banks,” said Sarkozy in Berlin yesterday at a joint briefing with the German chancellor. “We’ll do it in complete agreement with our German friends because the economy needs it, to assure growth and financing.” Merkel said European leaders will do “everything necessary” to ensure that banks have enough capital. Sarkozy said Sunday that he and Merkel would deliver a recapitalization plan by the next Group of 20 summit, scheduled for November 3.

Merkel and Sarkozy’s recapitalization plan would bypass a debt swap package for Greece, first proposed on July 21 and still being negotiated, that would impose a 21% write-off on Greek debt and saddle investors with a bigger share of the losses. “There is a big difficulty with respect to the Greek situation because it is looking as if the July 21 agreement just isn’t sufficient and that’s been increasingly recognized in Greece and the rest of Europe,” said Julian Callow, chief European economist at Barclays Capital in London.

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The plan to recapitalize banks signals Sarkozy’s willingness to accept a Greek debt restructuring, something he has been resisting, according to Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. “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,” said Kirkegaard. “Unsurprisingly, he chose the latter.”