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Merkel and Sarkozy agree banks deal

The leaders of Germany and France, the eurozone's two biggest economies, said they have reached an agreement about how to strengthen Europe's shaky banking sector amid the region's debt crisis.

"We are determined to do the necessary to ensure the recapitalisation of Europe's banks," German Chancellor Angela Merkel said last night following talks with French President Nicolas Sarkozy in Berlin.

A "comprehensive response" to the eurozone's debt crisis will be finalised by the end of the month, including a detailed plan on recapitalising the banks, Mr Sarkozy said at Berlin's chancellery.

"The economy needs secure financing to ensure growth. There is no prospering economy without stable banks," he said. "That is what is at stake."

However, both leaders declined to name a price tag for the new measures or elaborate further, saying the proposal must first be discussed with other European leaders.

Analysts have urged the eurozone to identify all the banks in the region that need to replenish their capital reserves, then decide whether to compel them to raise that money on the open markets and to provide government financing to the ones that cannot.

Many experts say the capital cushions of many European banks must be strengthened in order to withstand a possible government bond default by Greece. Some analysts fear that a Greek default could cause a severe credit squeeze that would even threaten banks not exposed directly to Greece's debt because banks could be afraid to lend to each other.

The credit freeze following the collapse of US investment bank Lehman Brothers in 2008 choked off lending to the wider economy and caused a deep recession.

Ms Merkel did not provide details about how the recapitalisation would work, saying only that all banks across the eurozone would be measured by the same criteria in co-ordination with, among others, the European Banking Authority and the International Monetary Fund.

Germany and France will now submit their proposal to shore up Europe's shaky banking sector to other European Union governments ahead of an October 17-18 summit of the bloc's 27 leaders in Brussels, they said.

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