Europe's options for overcoming the debt crisis narrowed asGermany doused expectations of a breakthrough at this weekend'ssummit and central bankers balked at extended bond purchases.

European stocks fell for a second day after German ChancellorAngela Merkel's office knocked down what it called “dreams” thatthe Oct. 23 summit will be the last word in taming the crisis.Christian Noyer, head of France's central bank, ruled out a rampingup of the European Central Bank's bond-buying program as part of amulti-pronged strategy to shield countries like Italy.

While Group of 20 finance ministers and central bankers pressedEuropean Union leaders to set out a strategy by the end of theweek, divisions flared over an emerging plan to avoid a Greekdefault, bolster banks and curb contagion.

“We're really in a bind here,” Carl Weinberg, founder and chiefeconomist at High Frequency Economics, said in an interview withBetty Liu on Bloomberg Television's “In the Loop.” “We have a lotof egos, a lot of national interests, a lot of politicalconsiderations, and that's just hampering us from getting to asolution.”

The ECB said yesterday it bought 2.2 billion euros ($3 billion)of bonds last week, the least since it restarted the market supportprogram in August over the objections of Germans on its council.While looking to exit the bond-buying business, the ECB alsoopposes the use of its balance sheet to boost thegovernment-financed 440 billion-euro rescue fund with enoughfirepower to do that job.

French Finances

Underscoring the stress on Europe's finances, Moody's InvestorsService said in a release overnight that France's top credit ratingis under pressure as the debt crisis has led to a “deterioration”of its government finances.

Moody's cited “the possible need to provide additional supportto other European sovereigns or to its own banking system” asstresses on French finances.

France will do “everything” to maintain its top debt ratings,Finance Minister Francois Baroin said today on France 2 television.“We have the highest public spending in the G8,” Baroin said. “Wehave room for maneuver.”

The Euro Stoxx 50 Index slid 0.8 percent to 2297.28 at 10:20a.m., led by BNP Paribas SA and Societe Generale SA. The eurotraded at $1.3718, down from $1.3738 in New York yesterday, when itslid 1 percent.

'Dampen Expectations'

“It is far from clear that the summit will deliver a packagethat is viewed as broad and deep enough,” David Mackie, chiefEuropean economist at JPMorgan Chase & Co, said in a notetoday. “Indeed, comments out of Germany appear to be trying todampen expectations of what the summit will deliver.”

Merkel's spokesmen Steffen Seibert stoked the disagreement bysaying that EU leaders won't provide the complete fix that globalpolicy makers are pushing for at their Brussels summit.

Merkel has made it clear that “dreams that are taking hold againnow that with this package everything will be solved and everythingwill be over on Monday won't be able to be fulfilled,” Seibert toldreporters in Berlin. The search for an end to the crisis “surelyextends well into next year.”

Group of 20 finance ministers and central bankers concludedweekend talks in Paris endorsing parts of Europe's emerging crisisplan. Providing a week to act, they set the Oct. 23 meeting ofEuropean leaders as the deadline.

'Disappointing' Response

“Quite frankly, Europe's response over the past year has beendisappointing,” Canadian Finance Minister Jim Flaherty said in aspeech yesterday in Dublin. “This is the world's most immediate andpressing problem,” Flaherty said, according to a prepared copy ofthe speech, and “is threatening to bring the world to the verge ofanother recession.”

On the summit agenda is how any recapitalization of Europe'sbanks “might be carried out in a coordinated way” and how to makethe European Financial Stability Facility, the EU's rescue fund forindebted states, as effective as possible, Seibert said. Theleaders will also discuss aid for Greece and ways to tighteneconomic and financial policy, he said.

In Greece, parliamentary debate is due to begin today on a freshround of austerity measures amid public protests and labor-unionunrest. Finance Ministry workers began a 10-day strike yesterday,complicating the government's efforts to collect taxes andhighlighting the mood in Europe's most-indebted country as Greeklawmakers face another vote on fiscal measures due in two days.That's a showdown Prime Minister George Papandreou needs to win toease the way for more foreign financing and stave off default.

Obstacles

Across Europe, obstacles to an accord include resistance bybankers to a deeper restructuring of Greek debt and discord amongEurope's capitals over how to multiply the firepower of theirbailout fund and recapitalize financial institutions. At stake isconfidence in the 17-nation currency union that Merkel stresses shewants to preserve.

In the works for the summit is a five-point plan foreseeing asolution for Greece, bolstering of the firepower of the EFSF, freshcapital for banks, a new push to boost competitiveness andconsideration of European treaty changes to tighten economicmanagement.

Forcing lenders to boost capital would be counterproductive, andgetting investors to accept larger losses on Greek holdingsdifficult, Deutsche Bank Chief Executive Officer Josef Ackermannsaid on Oct. 13. Ackermann, who chairs the Washington-basedInstitute of International Finance and spearheaded the July accord,was scheduled to hold talks in Brussels today with policymakers.

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