BRUSSELS (MNI) – European Union leaders have agreed on a bank
recapitalization plan, but the deal will only go ahead when the other
parts of the EU’s crisis package are completed, UK Prime Minister David
Cameron told reporters Wednesday evening.

On his way out of the summit meeting of the 27 EU leaders, which
ended a few minutes ago, Cameron said, “we made some good progress
tonight on the bank recapitalization.”

He added that the accord “wasn’t watered down, it has now been
agreed, [but] it will only go ahead when the other parts of the full
package go ahead. and further progress on that needs to happen tonight.”

The 17 Eurozone leaders are now meeting to try and strike a deal on
leveraging the limited funds of Europe’s bailout fund, the EFSF, and on
the size of the haircut that private banks will be asked to absorb on
their sovereign Greek bond holdings.

So far, there seems to be no consensus on the size of the
writedown, and several officials have indicated that there might not be
specific figures announced tonight. Banks and governments, especially
Germany, are at loggerheads over the issue. The bankers want to limit
their Greek debt writeoffs to little more than 42% while Germany’s
Angela Merkel has been pushing for 60%.

The bank recapitalization plan is closely intertwined with the size
of Greek debt writeoffs, since those will determine banks’ capital
needs. And they are in turn closely connected to the issue of leveraging
the EFSF, since the firepower required by the bailout fund will be
dictated to a large extent by banks’ needs and by the degree to which a
debt writeoff in Greece leads to contagion in other vulnerable Eurozone
states, which might then need help from the EFSF.

At the root of the new recapitalization plan is a mandate for banks
to raise their core tier 1 capital ratios to 9% by mid-2012. Poland,
which holds the rotating EU presidency, said this evening that the
recapitalization plan would apply to all European banks of “systemic
importance.”

European Central Bank Executive Board member Juergen Stark,
speaking in Dortmund, Germany earlier today, said that in his view bank
recapitalization was absolutely essential for solving the Eurozone debt
crisis. “Recapitalizing the banks is key to breaking this vicious
cycle,” he said.

–Angelika Papmiltiadou; A_papamiltiadou@hotmail.com
–Jack Duffy; jduffy@marketnews.com
–Nick Mackie; nmackie@marketnews.com

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