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Sarkozy discusses EU debt crisis with IMF's Lagarde German and French leaders to meet on eurozone crisis
(about 19 hours later)
IMF chief Christine Lagarde has held talks in France with President Nicolas Sarkozy on the eurozone debt crisis. French President Nicolas Sarkozy is to visit Berlin to discuss differences with German Chancellor Angela Merkel over the eurozone debt crisis.
The hour-long meeting was part of a flurry of weekend activity which will also see Mr Sarkozy visit Germany for talks with Chancellor Angela Merkel. Probable topics on the agenda of the leaders of the eurozone's top economies are Greece, strengthening banks and how to prevent the crisis spreading.
No comment was made on their talks, which focused on how to help banks over-exposed to sovereign debt. They are likely to discuss Franco-Belgian bank Dexia, Europe's first bank to fall victim to the debt crisis.
The European Commission has urged member states to draft a bailout plan to restore confidence in banking. Both leaders met visiting IMF chief Christine Lagarde in recent days.
However, Germany and France, the eurozone's dominant economic powers, have yet to agree on the way to proceed. Ms Lagarde visited Mr Sarkozy in Paris on Saturday and was in Berlin to see Mrs Merkel on Thursday, when the two women were joined by World Bank chief Robert Zoellick.
On Friday, the international ratings agency Fitch downgraded the sovereign credit ratings of Italy and Spain, putting new pressure on two of the eurozone's biggest economies. President Sarkozy is expected in the German capital on Sunday afternoon.
Another agency, Moody's, downgraded 12 banks in the UK and nine in Portugal. Key differences
Plans to expand the eurozone's bailout fund, and give it greater powers, were agreed in July and have been ratified by most national parliaments. Germany and France have differed over how to recapitalise Europe's banks, said by some to require between 100bn (£86bn; $134bn) and 200bn euros to withstand the sovereign debt crisis.
However, these plans are now seen as inadequate. Further action is now being discussed and leaders have said they hope to announce new measures at a G20 meeting in Cannes at the beginning of November. Paris is believed to want to use the eurozone's bailout fund - the European Financial Stability Facility (EFSF) - to recapitalise its own banks, while Berlin is insisting the fund should be used as a last resort.
Downgrades Another key dispute is how to use the EFSF to buy sovereign debt. France does not want to set guidelines but Germany would like to limit the sum used for each member state and set a time limit for bond purchasing, according to German newspaper Handelsblatt.
Ms Lagarde, Mr Sarkozy's finance minister until she joined the IMF this year, arrived at the presidential palace in the French capital. On Sunday, "Dexia will be among the topics that will be discussed but the main topic is Greece and the eurozone, as banks are only a consequence [of the crisis]", a source at the French finance ministry told Reuters news agency.
Earlier, a German source told Reuters news agency Paris wanted to be able to tap the eurozone's bailout fund itself to recapitalise its own banks, which have the largest exposure to peripheral eurozone debt. Last week, Belgian and French finance ministers announced plans to siphon off Dexia's riskiest assets into a "bad bank" and remove its French local government lending operations, as fears grew that it might collapse due its large holdings of Greek government debt.
However, Mrs Merkel said on Friday that the European Financial Stability Facility was a backstop to be used "only if that country is unable to cope on its own". Reports suggest the board of Dexia will meet on Sunday afternoon to discuss how best to split up the bank.
Fitch cut Italy's rating by one notch, from AA- to A+, following a Moody's downgrade earlier this week. French banks are seen by analysts as over-exposed to Greek, Italian and Spanish debt, and leaders want to prevent any new, bigger reduction in Greece's debt which might trigger a banking crisis across Europe.
Fitch cited the "intensification" of the eurozone debt crisis that "constitutes a significant financial and economic shock which has weakened Italy's sovereign risk profile". "We must ensure that the banks have sufficient capital" to prepare for a possible further reduction, German Finance Minister Wolfgang Schaeuble told the Frankfurter Allgemeine Zeitung (FAZ) newspaper.
The agency also cut Spain's rating by two notches, to AA-. In July, leaders agreed that private lenders should take a hit if Greece is forced to default on its debts. However, the cut of 21% proposed could "perhaps" be insufficient, Mr Schaeuble said.
The ratings agency raised concerns about the strength of Italian banks, particularly in light of the current debt crisis. Greek bailout
It talked of the "small but no longer negligible risk that a further worsening of the eurozone debt crisis and volatility in the value of Italian government bonds will further erode confidence in the banking system". Talks are continuing over the latest bailout tranche for Greece, which could run out of cash as soon as mid-November.
The agency said a "vicious cycle" could emerge where a growing lack of confidence in Italian banks could knock confidence in government debt, which could in turn undermine the banks further. The European Commission, the European Central Bank and the IMF are currently deciding whether to release about 8bn euros to help the Greek government pay its bills.
With regards to Spain, Fitch also cited the deepening debt crisis, and raised questions about the country's ability to cut its debt levels quickly - and its growth prospects. This is money from the original 110bn euro bailout agreed last summer. Another 109bn euro bailout was also agreed by European leaders in July, but this has yet to be ratified.
The country's high underlying budget deficit and its fragile economic recovery made Spain "especially vulnerable" to external shocks, it said. Despite efforts by leaders to contain the crisis, there is little evidence that its end is nearing, analysts say.
Fitch added that it expected growth to remain subdued between now and 2015, and unemployment to remain high. Spain has the highest jobless rate in the eurozone, at more than 20%. "There is a high risk that this crisis further escalates and broadens," the German finance minister said.
However, the agency said the Spanish economy should grow faster than the eurozone average after this date. On Friday, the international ratings agency Fitch downgraded the sovereign credit ratings of Italy and Spain, and another agency, Moody's, downgraded 12 banks in the UK and nine in Portugal.
Plans to expand the EFSF, and give it greater powers, were also agreed in July and have been ratified by most national parliaments. Slovakia will vote on the proposals this week.
However, these plans are now seen as inadequate and leaders have said they hope to announce new measures at a G20 meeting in Cannes at the beginning of November.