The leaders of France and Germany will not leave this week's European Union summit until a "powerful" deal is reached to arrest the euro-zone debt crisis, Paris said on Wednesday, as new figures exposed ever more severe stress among Europe's banks.
French President Nicolas Sarkozy and German Chancellor Angela Merkel will lay out a plan at Friday's E.U. summit to impose mandatory penalties on euro states that exceed deficit targets, aiming to restore market trust and prevent the region's debt crisis spiraling out of control.
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.
U.S. Treasury Secretary Timothy Geithner, on a tour of Europe to lobby for action, voiced confidence in the Franco-German plan to overhaul the E.U. treaty to anchor tighter budget discipline.
"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 European Central Bank 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 U.S. 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 U.S. forecast in a Reuters poll of money market traders.
Germany is set to reactivate its bank rescue fund at next week's cabinet meeting, a senior 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% from 1.25%, 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 signaled that a euro zone "fiscal compact" could encourage the ECB to act more forcefully.
Ratings agency Standard & Poor's heightened the sense of crisis this week by warning it could cut credit ratings across the 17-nation currency bloc, including for its EFSF rescue fund, a move that would fundamentally weaken it.
A snap Reuters poll of 13 economists found 11 expect France to lose its top-notch AAA credit rating within three months, a potential blow to Sarkozy's bid for re-election next year.
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