France vows powerful EU summit deal, Germany downbeat

Pessimistic comments from EU paymaster Germany and new figures exposing growing stress among Europe?s banks took the shine off financial market hopes of a turning point in the euro zone debt crisis at a summit this week.

President Nicolas Sarkozy and Chancellor Angela Merkel will lay out a plan to amend the EU treaty to anchor stricter budget discipline in the euro area, aiming to restore market trust and prevent the sovereign debt crisis spiralling out of control.

A French minister said the leaders of France and Germany would not leave Friday?s European Union summit until a ?powerful? deal is reached to arrest the crisis.

But while Paris voiced determination, a senior German official gave a deliberately downbeat assessment of prospects for an agreement in an apparent effort to jolt partners into accepting Berlin?s terms and restrictions.

?I have to say today, on Wednesday, that I am more pessimistic than last week about reaching an overall deal … A lot of protagonists still have not understood how serious the situation is,? the official told a pre-summit briefing.

?My pessimism stems from the overall picture that I see at this point, in which institutions and member states will have to move on many points to make possible the new treaty rules that we are aiming for,? he said, speaking on condition of anonymity.

The euro slipped, European share prices turned negative and safe-haven German bond futures rose after the official dented investors? hopes of a comprehensive solution.

US Treasury Secretary Timothy Geithner, whose fourth trip to Europe in as many months speaks of the alarm in Washington at the damage the debt crisis could wreak on the US economy, backed the Franco-German plan to impose mandatory penalties on euro states that exceed deficit targets and bring forward a permanent rescue fund.

?I have a lot of confidence in what the president of France and the minister are doing, working with Germany to build a stronger Europe,? Geithner told reporters after talks with French Finance Minister Francois Baroin.

?Neither Nicolas Sarkozy nor Angela Merkel will leave the negotiating table of this summit until there is a powerful deal,? Baroin told Canal+ television.

Figures released on Wednesday showed just how urgently some European banks need help.

Italian banks had to borrow 153.2 billion euros in emergency liquidity from the ECB in November, up from 111.3 billion euros at the end of October, Bank of Italy data showed, another big leap in reliance on the central bank which has almost quadrupled since June, when Italian lenders took 41.3 billion euros.

Euro zone banks took more than $50 billion in the ECB?s first dollar funding operation since the world?s leading central banks agreed last week to cut their cost, five times the $10 billion forecast in a Reuters poll of money market traders.

And Germany is set to reactivate a bank rescue fund created at the height of the 2008 financial crisis at next week?s cabinet meeting, a government official said.

The ECB?s governing council holds a crucial meeting on Thursday, before the EU summit, at which most economists expect it to cut interest rates to 1.0 percent from 1.25 percent, introduce longer-term liquidity tenders for banks and widen the collateral they can use to borrow from it.

ECB President Mario Draghi, who met Geithner on Tuesday in Frankfurt, has signalled that a euro zone ?fiscal compact? could encourage the ECB to act more forcefully.

Ratings agency Standard

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