EU crisis summit: Leaders agree on bank recapitalization plan

European Union leaders agreed on Wednesday a plan to recapitalize banks so they can withstand the debt crisis, but the deal is contingent on the eurozone adopting a full package to protect the euro.

“We made good progress on the bank recapitalization, that wasn’t watered down, it now has been agreed,” British Prime Minister David Cameron said after a meeting of the 27-nation EU, which preceded talks among the eurozone’s 17 leaders.

“It will only go ahead when the other parts of the full package go ahead and further progress on that needs to happen tonight,” Cameron told reporters.

With fears growing that the eurozone debt drama will turn into a banking system meltdown, European leaders want the banks to boost their core capital buffers so they can absorb expected losses on their holdings of Greek debt.

But eurozone negotiators were struggling to convince banks to accept a write down of at least 50 percent, with bankers offering 40 percent instead.

“We discussed the situation and all leaders stressed their common resolve to do their utmost to overcome the crisis and to help face, in a spirit of solidarity, the challenges confronting the European Union and the Euro area,” EU president Herman Van Rompuy said.

“Short term recapitalization is needed in the current exceptional circumstances to create a temporary buffer allowing the banking system to withstand shocks in a reliable manner,” he said in a statement.

In a summit statement, EU leaders said measures to restore confidence in Europe’s banks “are urgently needed and are necessary in the context of strengthening prudential control of the EU banking sector.”

They declared a “broad agreement” for banks to increase their core Tier 1 capital ratio to 9.0 percent of assets by June 30, 2012 − this is two percentage points higher and seven years earlier than under new international banking rules recently agreed in the Basel III regulators accord.

Banks must first try to raise funds through “private sources of capital, including through restructuring and conversion of debt to equity instruments.”

Until the target is reached, the statement said, “banks should be subject to constraints regarding the distribution of dividends and bonus payments.”

Governments should provide aid if necessary, the document says. But if such aid is impossible among eurozone nations, the bloc’s bailout fund, the European Financial Stability Facility, could provide the money.

The declaration is devoid of any monetary figures but EU sources said recapitalization would amount to 108 billion euros ($150 billion) − although the precise amount needed will depend on how much Greek debt the banks are willing to write off.

All leaders stressed their common resolve to do their utmost to overcome the crisis and to help face, in a spirit of solidarity, the challenges confronting the European Union

Herman Van Rompuy, EU president

Merkel, Sarkozy ready to talk with banks on Greek debt cut

The leaders of France and Germany, President Nicolas Sarkozy and Chancellor Angela Merkel, will Wednesday talk in person to world bankers to negotiate a reduction in Greek debt, a senior government source said Wednesday.

“They want to speak to the banks this evening,” said the source, who is close to the negotiations but spoke on condition of anonymity.

The source said Europe would not rule out arm-twisting the bank lobby, whereas previously all the emphasis had been on securing “voluntary” agreement so as to avoid triggering credit default insurance clauses.

The EU wants banks to take a write-down of 50-60 percent on their holdings of Greek government bonds, targeting a 100-billion-euro reduction in the 350-billion debt mountain in Athens.

One top French governmental source said a “plan B” that would see Greece face a formal debt restructuring was an alternative, if a suitable deal for taxpayer-funded bailout partners cannot be found.

The idea is that the ratio of Greek debt-to-GDP falls from the current 160 percent to 120 percent, still way about the EU 60 percent limit but more manageable.

Germany has been militant in pressing for a bigger haircut, while France had erred on the side of the European Central Bank which warned of the risk that banks could suddenly withdraw funding from other vulnerable eurozone governments.

Banks should be subject to constraints regarding the distribution of dividends and bonus payments

Herman Van Rompuy, EU president

Italy commits to presenting growth plan

Italy has told its European partners that it will present a growth plan by November 15, the Ansa news agency reported Wednesday, citing a letter sent by Prime Minister Silvio Berlusconi to a Brussels summit.

The letter of intent, demanded by Berlusconi’s European peers as part of efforts to solve the eurozone debt crisis, also includes a plan to raise the retirement age to 67 from 2026, a measure negotiated with the premier’s Northern League coalition partner, Ansa said.

Among other commitments made, the government said companies would now be freer to lay-off staff while it would also adopt a similar stance on civil servant employment.

Italy has been put on the spot at the summit, with Germany and France pressing Berlusconi to deliver a clear cut plan to boost growth and cut spending so as to ensure his country is not the next victim of a eurozone debt crisis which has already claimed Greece, Ireland and Portugal.

The Italian premier waved as he arrived in Brussels but ignored reporters’ questions, three days after a first summit at which Merkel and Sarkozy told him to come back with answers.

His response was keenly awaited at a summit focused on finding a lasting solution to the eurozone debt crisis, with plans to cut Greece’s crippling debt, recapitalize banks and boost the firepower of the bloc’s bailout fund.

“Our Italian friends know that we must go with the principle that tonight it will be announced that Italy will make important (budgetary) consolidation and structural (reform) efforts,” said Luxembourg premier Jean-Claude Juncker, who heads the group of 17 eurozone finance ministers. “This is a must.”