Euro-area leaders assembled in Frankfurt seeking to narrow divisions four days before a summit to solve the sovereign debt crisis.

A Franco-German split on the role of the European Central Bank in leveraging the euro bailout fund emerged at an event in Frankfurt today to mark the conclusion of Jean-Claude Trichet’s term as the ECB’s president. The disagreements among policy makers came as banks lobbied against forced recapitalization and deeper writedowns on Greek debt.

While German Chancellor Angela Merkel this week sought to lower expectations that the crisis-fighting effort would climax at the Sunday summit in Brussels, Group of 20 finance chiefs last week set the meeting as a deadline for action. Failure risks a global economic slump, they said.

“Many expect to be underwhelmed at the weekend,” David Mackie, chief European economist at JPMorgan Chase & Co., said in an interview. “If they haven’t settled the leverage issue, then the sense of being underwhelmed will be overwhelming.”

Today, French President Nicolas Sarkozy left Paris as French media reported his wife was giving birth to his first daughter to meet Merkel, Trichet and International Monetary Fund Managing Director Christine Lagarde at the event at the Frankfurt Opera House, according to a spokesman for Sarkozy.

Dragi’s Presence

Also there were Mario Draghi, who replaces the retiring Trichet Nov. 1, European Union President Herman van Rompuy and European Commission President Jose Barroso. The French and German finance ministers, Francois Baroin and Wolfgang Schaeuble, were there as well. No statement was planned.

Policy makers are struggling to end a crisis that began in Greece two years ago this week. In Athens, protesters clashed with police outside the Parliament after Prime Minister George Papandreou vowed to push through a further round of austerity to keep the aid pipeline open.

The issues frustrating European authorities include how to write down of as much as 50 percent on Greek bonds, setting up a backstop for banks and finding a continued central bank role.

France’s Baroin disclosed to reporters the depth of the disagreement on the ECB, which along with Germany, has rejected using its balance sheet to bolster the 440 billion-euro ($607 billion) European Financial Stability Facility.

Insurance Fund

While Germany endorsed enabling the EFSF to insure a portion of cash-strapped nations’ bond sales, Baroin said France wanted to turn it into a bank that could tap the ECB.

“Everyone knows the reticence of the central bank and everyone also knows of the reticence of the German position,” Baroin said. “For us it is and will remain the most effective position. The Americans do it, the British do it.”

Trichet has been a key part of Europe’s crisis-fighting effort, pushing the ECB to buy bonds in the secondary market, a role it may be forced to keep under a revamped strategy.

Van Rompuy praised Trichet for taking “unconventional” steps and not being beholden to dogma.

“Independence doesn’t mean detachment from political decision-making,” Van Rompuy said at the Trichet farewell ceremony. “Monetary policy cannot be conducted in a social and political void. The central bank’s independence is a right, but also entails duties.”

Even under a bond-insurance program, there may not be enough funds available without the ECB to persuade investors that Europe can contain the crisis. The EFSF might be allowed to insure 20 percent to 30 percent of new bonds sold by distressed euro-area governments, a person familiar with the deliberations said.

Mackie calculates that given its existing commitments, the fund has about 270 billion euros left. His figures suggest that with Italy, Spain and Belgium facing funding needs of more than 1 trillion euros over the next three years, guaranteeing the first 20 percent of losses would leave less than 100 billion euros for other fire-fighting tasks.

Bloomberg News


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