Crunch time for euro crisis

International Monetary Fund (IMF) managing director Christine Lagarde had talks in Paris yesterday with President Nicolas Sarkozy on a crunch weekend for the European debt crisis.She made no comment either as she went into the Elysee palace or as she left an hour later.The talks preceded a trip to Berlin by Sarkozy today to meet German Chancellor Angela Merkel, as Eurozone leaders cobble together a plan to recapitalise banks overexposed to risky sovereign debt.On Friday, the European Commission gave member states ten days to agree a plan to shore up their lenders, which the IMF thinks will need between ¤100 and €200 billion (Dh496 billion and Dh992 billion) to cover potential losses.French banks in particular are seen as overexposed to Greek, Italian and Spanish debts, and leaders fear a default in a weaker Mediterranean economy could trigger a financial crisis across the continent.Highlighting the urgency of the task, ratings agency Moody's downgraded a dozen British banks over concerns government support for lenders could be withdrawn, and the Fitch agency downgraded Italy's and Spain's credit ratings.The debt crisis, which began in Greece, has snared Ireland and Portugal and now put Italy and Spain in the firing line too, threatening to sink the entire euro project as banks find it hard to raise funds.The French, German and Italian employers' federations yesterday appealed for greater European integration, calling for a new treaty to get over ‘the current shortcomings of the Eurozone.' "So that the foundations can be laid for a prosperous and politically strong 21st century Europe, we call on the European Union to start work on a new treaty, which would be a new step towards closer political and economic union," France's Medef, Germany's BDI and Italy's Confindustria said.They stressed that sufficient capitalisation for banks was essential to resolve the current crisis and should be treated as such.World Bank President Robert Zoellick agreed, accusing Merkel's Germany of lacking vision in an interview with economic weekly WirtschaftsWoche.Fears of a ‘credit crunch' have raised the spectre of 2008, when US giant investment bank Lehman Brothers collapsed and could have taken the global financial system with it but for massive government support.Merkel, whose country is Europe's strongest economy and effective Eurozone paymaster, insisted on Friday under-pressure banks must first turn to investors for funds before appealing for national or European cash.France, the Eurozone's next biggest player, is reportedly more ready to turn to public funds to shore up its at risk lenders, and a state investment fund has already drawn up plans to rescue Franco-Belgian bank Dexia.Negotiations between the French and Belgian governments on Dexia stepped up yesterday as top officials tried to reach agreement on guarantees and the price to be paid for the bank's various offshoots.Officials at the finance ministry in Paris insisted there was no rift with Berlin, and said the eventual bail-out plan would be agreed on a European level after Sarkozy's meeting with Merkel. Diplomats said France, in fear of losing its top notch AAA credit rating, would prefer to recapitalise banks with the existing but stretched ¤440 billion European Financial Stability Facility.