As crisis widens, Europe's leaders keep talking

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French President Nicolas Sarkozy and German Chancellor Angela Merkel met over the weekend and told reporters Monday they had worked out yet another plan to contain the widening financial crisis sweeping the continent. But they deflected questions about the plan's details.

By John W. Schoen, Senior Producer

More than a year after European officials began squabbling over solutions — and the continent's worst financial crisis since World War II has begun to engulf the banking system — the talking continues.

On Monday, Dexia, an embattled Franco-Belgian bank, became the first victim of the credit squeeze battering European lenders. European leaders moved to save the bank as the leaders of France and Germany emerged from yet another weekend of "emergency talks" on a coordinated plan to backstop European lenders.

“We are determined to do everything necessary to ensure the recapitalization of Europe’s banks,” Chancellor Angela Merkel said in Berlin after meeting with President Nicolas Sarkozy of France.

But the two leaders provided no details, leaving investors with little confidence that the plan will work.

"Now we have a plan to have a plan for recapitalization," said Steen Jakobsen, chief investment officer at Saxo Bank, a Danish investment bank. "We so many have plans for plans that I'm getting confused."

Though solutions remain murky, the problems facing Europe were brought into sharper focus by Dexia's failure. With no unified backstop in place, France and Belgium stepped in with $120 billion in loan guarantees for Dexia, which was taken over by the Belgian government.

As the crisis spreads, it's unclear how many more banks are at risk of being swamped by losses on holdings of government bonds issued by heavily indebted countries like Greece.

Now, as individual governments are forced to backstop their banks, the debt issued by those countries is being called into question. Moody's warned on Monday that it was reviewing Belgium's credit rating for a possible downgrade.

The risk is that Europe's governments find themselves caught in a vicious cycle. As Europe slides into recession, banks holding government bonds face losses if those bonds default. But without a coordinated plan to backstop failing banks, the burden will fall to individual governments. That cost of bank bailouts would further strain those government's budgets, increasing the risk of default.

"The governments that have problems with sovereign debt are recapitalizing banks that have problems with sovereign debt," said Adrian Schmidt, an investment strategist at Lloyds Bank. "It's getting somewhat circular."

Merkel and Sarkozy said Monday they would finalize the plan to backstop Europe's banks by the end of the month. But they offered no details, including the possible price tag for a unified program to provide more cash to the banking system.

There's widespread agreement that Europe's banks need more capital to weather the ongoing financial crisis. But there's little consensus over just how much they need. The problem is compounded by the steep drop in the price of Europe's bank stocks, which has made it harder for them to sell stock to raise cash.

The hope is that government pledges to backstop failing banks will help calm investors and provide bankers with more sources of private funding. But investors remain leery.

"I do not think being guaranteed by governments is any guarantee these days," said Jakobsen.

The announcement from Sarkozy and Merkel that a plan was near follows multiple failed attempts at a coordinated solution. Those have included a European version of the U.S. Troubled Asset Relief Program launched in 2009 to bail out American banks. Last year, European leaders cobbled together a so-called "financial stability facility," but that fund is now widely seen as too small to cover potential losses.

"We've been talking about Europe and potential solutions for months," said Scott Nations, President of NationsShares. "First it was leveraging the stability facility. And then they were going to do euro TARP. They're not coming to any conclusions or any solutions."

It remains to be seen how the latest plan will resolve the underlying threat of a debt default by Greece and other weaker economies. As the crisis has widened, the European Union's 17 member governments have remained split over a basic question: who should foot the bill?

Europe's leaders are running out of time to resolve that long-simmering debate. Over the weekend, Greek officials wrapped up the latest round of talks on the next $11 billion installment of an aid package needed to stave off a debt default. Without the payment, Athens is expected to run out of cash in the next few weeks. The latest round of proposals may be Greece's last chance to head off the financial collapse that has been looming for over a year.

But for now, the talking continues. On Monday, the EU announced that its next regular summit would be postponed by six days to Oct. 23 to allow time "to finalize our comprehensive strategy on the euro area sovereign debt crisis", according to European Council President Herman Van Rompuy.