The leaders of Germany and France, the eurozone's two biggest economies, say they have reached agreement on strengthening Europe's shaky banking sector.

German Chancellor Angela Merkel said she and French President Nicolas Sarkozy "are determined to do the necessary to ensure the recapitalization of Europe's banks."

Merkel spoke after talks with Sarkozy at Berlin's chancellery Sunday aimed at forging an agreement ahead of a summit of the European Union's 27 leaders later this month.


Belgian Finance Minister Didier Reynders, left, and Prime Minister Yves Leterme address a joint news conference after a cabinet meeting this weekend in Brussels. The governments of France, Belgium and Luxembourg said Sunday they had approved a plan for the future of embattled Franco-Belgian bank Dexia. (Francois Lenoir/Reuters)

The German chancellor has insisted that the Oct. 17-18 summit in Brussels must send a clear signal on the issue in a bid to restore market confidence.

Germany and France, which together represent about half of the 17-nation currency zone's economic output, regularly hold talks before EU summits to chart out joint positions.

The IMF has said banks across the continent might need up to $267 billion US in new capital. The EU disputes the IMF's estimate, but has been warning that lending between banks and from banks to businesses is threatening to freeze up.

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.

Banks are afraid to lend to each other for fear they won't get paid back. The credit freeze following the collapse of U.S. investment bank Lehman Brothers in 2008 choked off lending to the wider economy and caused a deep recession.

Merkel insisted this week that the eurozone should not hesitate to bolster its banks if experts conclude it to be necessary, because failing to do could lead to "vastly higher damage."

Deal reached for Dexia restructuring

It came after he governments of France, Belgium and Luxembourg said Sunday they had approved a plan for the future of embattled bank Dexia.

In a three-sentence statement issued by the Belgian prime minister's office, they said they supported a proposal by the bank's management that will be submitted to its board of directors.


French President Nicolas Sarkozy and German Chancellor Angela Merkel reached an agreement on bolstering the European Union's banking sector ahead of a summit of the EU's 27 leaders later this month. (Patrick Kovarik/Reuters)

The board is scheduled to hold a crisis meeting Sunday afternoon in Brussels amid reports that the bank might be split up. A bank spokesman said a news conference was expected Sunday evening or Monday morning.

The government statement said the "suggested solution" had been "the result of intense consultations with all partners involved" — which would include the three countries. France and Belgium became part owners of the bank during a $7.8 billion 2008 bailout. They have promised to ensure that no Dexia depositors lose money. Luxembourg holds a smaller stake.

After Dexia's shares plunged last week amid fears it could go bankrupt, the French and Belgian governments stepped in and guaranteed its financing and deposits. The bank said in a statement Friday that trading in its shares would remain frozen until it could "communicate more precisely on the various choices and

options concerning the future of the group."

The bank has significant exposure to Greek debt, and there are fears Greece may default in some fashion.