Facing renewed calls by US President Barack Obama for swift action to tackle its debt crisis, Euro zone leaders are continuing efforts to stave off a credit crunch with talks in Berlin and Athens.
Efforts now seem focused on reassuring investors that Europe's banks are safe, to dispel fears of a possible replay of the 2008 collapse of US investment bank Lehman Brothers which almost took the global financial system down with it.
However, a split has reportedly emerged between the euro zone's two top economies over how best to use a stronger rescue fund, just days before the French and German leaders again in Berlin.
Stopping short of an interest rate cut, the European Central Bank announced new measures yesterday to provide cash-strapped banks with liquidity, cheering markets with news it would beef up "non-standard" action to help out lenders.
For its part, the European Commission called for "coordinated action" by the 27 European Union nations to recapitalise banks, but German Chancellor Angela Merkel said "the first step is for banks to recapitalise themselves."
She said there would be "far greater damage" if banks needed to be rescued by governments, after talks in Berlin last night with the heads of the International Monetary Fund, the World Bank and the OECD.
Pressure nevertheless increased further when Obama, mired by a stagnant US recovery and high unemployment, issued a stark warning, saying Europe must "act fast" to avoid global debt contagion.
Merkel, whose country is Europe's biggest economy, was set to continue a flurry of international meetings, holding a working lunch today with Dutch Prime Minister Mark Rutte.
France's Jean-Claude Trichet, bowing out as president of the Frankfurt-based ECB after eight years, said the bank would continue to assist lenders although he also urged them to bolster their balance sheets.
The debt crisis that began in Greece, snaring Ireland and Portugal on the way and now threatening Italy and Spain, is putting at risk the whole euro project as banks exposed to sovereign debt find it impossible to raise funding.
Moody's today downgraded its ratings for a dozen British banks, including state-owned Royal Bank of Scotland and Lloyds TSB, due to the removal of government financial support.
Shares in Franco-Belgian lender Dexia were suspended yesterday as the two countries scrambled to put together a rescue package for the bank, the first European bank to be dragged down by the euro zone debt crisis and which also had to be bailed out in 2008.
Official data in Frankfurt showed overnight deposits at the ECB by euro zone banks hit a fresh 2011 peak yesterday for the fifth day in a row, a signal banks are reluctant to lend to one another.
Splits have emerged between France and Germany over how best to use a euro zone beefed-up bailout fund to tackle the debt crisis, a German newspaper reported Friday.
Two days before Merkel meets French President Nicolas Sarkozy, the euro zone's top two economies are divided on how the €440 billion war chest should be deployed, the business daily Handelsblatt said. Paris wants the fund to have unlimited power to buy up the bonds of struggling countries, such as Greece, whereas Germany wants to impose restrictions, said Handelsblatt, citing unnamed EU diplomats in Brussels.
There are also divisions over using the fund to bail out distressed banks. France wants to use the fund to recapitalise lenders exposed to shaky bonds, whereas Germany believes the banks must dig into their own pockets first.
EU leaders decided in July to boost the effective lending capacity and the scope of the bailout fund, known as the European Financial Stability Facility (EFSF) but are still grappling over how exactly it will function.
The Netherlands became the 15th euro zone country to ratify new powers for the rescue fund - approval by all 17 eurozone nations is needed - leaving Malta and Slovakia, where a junior coalition partner has vowed to block it.
