European officials are outlining a rescue plan that may includedeeper investor losses on Greek bonds, higher bank capital levelsand increased firepower for bailouts and the International MonetaryFund.

The plan's elements emerged as finance ministers and centralbankers from the Group of 20 began talks in Paris, seeking ways toend Europe's two-year sovereign debt crisis. Underscoring the needfor action, Standard & Poor's yesterday cut Spain's creditrating for the third time in three years and new data showed theeight largest U.S. money-market funds almost halved their lendingto French banks last month.

“The sense of urgency is here,” Eric Chaney, chief economist forAXA SA, Europe's second-largest insurer, said in a BloombergTelevision interview with Maryam Nemazee in Paris today. “Therewill be a lot of pressure on Europeans to find a solution.”

European leaders may complete the plan at an Oct. 23 summit topresent to a gathering of G-20 chiefs Nov. 3-4. The aim is to craftwhat the French and German governments call a “durable” fix to theturmoil that has propelled Greece to the edge of default and israttling global markets. Europe's Stoxx 600 headed for a third weekof gains amid optimism policy makers will contain woes.

Investor Losses

Three months after banks and insurers agreed to a voluntary lossof about 21 percent on their Greek debt, they are being pushed toaccept a larger so-called haircut as Greece's economy deteriorates.German banks are preparing for losses of as much as 60 percent,said three people with knowledge of the matter.

“A Greek debt writedown, even if it takes place, should only beventured after careful and conscientious preparation in order toprevent anything worse from happening and to pave the way forstructural reforms,” German Chancellor Angela Merkel said in aspeech in Karlsruhe, southwest Germany, today.

In Greece, a wave of strikes and walkouts protesting budget cutssparked criticism from Finance Minister Evangelos Venizelos today.“The picture we have seen over recent days is one of lawlessness,”he told lawmakers. “Some believe that occupations, strikes,blackmail, pressure can lead to the satisfaction of vestedinterests to the detriment of the national interest.”

Bank Capital

Concerned that banks lack the capital to absorb a shock insovereign debt, European authorities are working on a plan that mayforce financial institutions to raise at least 100 billion euros($138 billion) in additional capital, according to analysts'estimates. That money would come either from existing investors —who are signaling they may resist providing it — or state fundingthat may come with strings attached.

The European Banking Authority intends to complete an assessmentof the region's capital needs before a meeting of European Unionfinance ministers to precede the summit, said Jonathan Todd, aspokesman for the European Commission.

Banks may be required to maintain a 9 percent capital buffer toabsorb sovereign risks, up from the 5 percent core capital levelused in July's stress tests, a person with knowledge of discussionsat the authority, the EU's top banking regulator said thisweek.

French Finance Minister Francois Baroin said on Europe 1 radiotoday that 9 percent may be a “good” level.

Stocks Gain

The 46-member Bloomberg Europe 500 Banks and Financial ServicesIndex has dropped just under a third this year, paced by Dexia SA,the Franco-Belgian lender that's being broken up. Today, the Stoxx600 and the gauge of banks added 1 percent.

In one boost for Europe's crisis-fighting abilities, Slovakianlawmakers yesterday approved a revamping of the region's rescuefund, completing ratification across the 17 euro countries.

The European Financial Stability Facility will now have a warchest of 440 billion euros, be allowed to buy the debt of stressedeuro-area nations, aid troubled banks and offer credit line togovernments. Its original role was to sell bonds to finance rescueloans.

Its new spending power may still not be enough to contain thecrisis with Royal Bank of Scotland Group Plc economists saying a 2trillion-euro capacity is required to persuade investors that Spainand Italy are safe. With taxpayers chafing at providing even morecash and AAA-rated governments worried about their own standing,policy makers are now looking to leverage the fund, perhaps byinsuring a portion of new bonds issued by debt-ridden nations.

French Spreads

French 10-year government bonds fell today, increasing the extrayield investors demand to hold the securities instead of Germanbunds to as much as 91.3 basis points. That's the most since theeuro started in 1999.

European officials are working out how to scale up the financialclout without requiring another round of parliamentary approvals ortapping the European Central Bank's balance sheet. That may involveproviding a partial guarantee to new bond sales, a step endorsed bythe ECB.

There may also be a consensus in the euro area to set up thepermanent rescue fund, the 500 billion-euro European StabilityMechanism, by mid-2012, a year earlier than planned.

“The resources available in the IMF and the EFSF are notadequate,” South African Finance Minister Pravin Gordhan said inParis. He said emerging market powers have indicated a readiness tooffer more support for international institutions.

Help Considered

Countries from China to Brazil are considering increasing IMFlending resources to help stem Europe's woes, G-20 and IMFofficials said. Talks are still in the preliminary stages aspotential contributors wait to see what fixes Europe deliversfirst. Managing Director Christine Lagarde said last month that hercurrent $390 billion cashpile may not be large enough to meet allloan requests should the global economy worsen.

“Emerging markets, in particular China, may feel the pressure atthis point to make some gestures to help the West,” said DariuszKowalczyk, a Hong Kong-based strategist at Credit Agricole CIB.“They do not want to invest too much given that the West's problemsare of its own making, and if they help, they want to do so in away that brings them benefits and recognition.”

The G-20 meetings in Paris conclude tomorrow with a pressconference scheduled for 4:15 p.m.. Ministers meet for dinnertonight at about 7 p.m.

Bloomberg News

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