German leader backs more cash for Europe's banks

German Chancellor Angela Merkel said Wednesday she would support a plan to shore up European banks with more cash, if such a move was deemed necessary.

Merkel, in Brussels to meet with European Commission President Jose Manuel Barroso, also said private investors may have to take deeper losses as part of a Greek rescue.

The International Monetary Fund earlier Wednesday called on Europe to pour billions of euros into protecting its biggest banks, weakened by their exposure to the debt of Greece and other financially strapped governments.

But later, in a dramatic turnaround, a senior official with the IMF retracted his earlier statement that it could intervene in bond markets to support struggling Italy and Spain.

In other developments in Europes debt crisis Wednesday:

• France's finance minister signalled that a rescue of Franco-Belgian bank Dexia SA could be announced as soon as Thursday. Dexia is finding it increasingly difficult to fund its day-to-day operations as other banks are reluctant to lend to it.
• Thousands of civil servants and other workers walked off the job in Greece, part of a 24-hour protest against austerity measures imposed by the government in a bid to avoid debt default.

French Finance Minister Franois Baroin said Dexia's supervisory board would unveil "a very important response" to the crisis on Thursday.

He also told French radio station RTL that a solution would likely involve French state-owned banks CDC and Banque Postale taking over Dexia's municipal lending operations.

Dexia is one of the biggest lenders to French municipalities.

On Tuesday, France and Belgium promised toprop up the bankand insure its deposits, after a sharp drop in its share price.

Three rounds of stress tests since the 2008 credit crunch have failed to restore confidence in the banking sector and Dexia was not even one of the nine banks that failed the most recent exercise in July, or among the 16 that barely passed.

Merkel told journalistsmeasures should be taken urgently "if there is a common view that banks aren't sufficiently capitalized for the current market condition."

Banks are required to hold a certain amount of low-risk assets that can absorb losses on their investments, but many analysts say that those cushions are much too small in light of the worsening eurozone crisis.

There was evidenceWednesday that consensus continues to elude European lawmakers.

Finance ministers from the 27 European Union countries spent several hours discussing what to do about their banks at a get-together in Luxembourg Tuesday without reaching a conclusion.

IMF pushes for expanded powers

Earlier Wednesday, the IMFa key contributor to eurozone bailouts so farpushed for substantial changes to handling the debt crisis.

Antonio Borges, the head of the IMF's Europe program, surprisedanalysts by proposing a greatly expanded role for his organization, including intervention in bond markets to buy the bonds of Italy and Spainto keep the crisis from engulfing those larger economies.

Later, Borges reversed that, saying that "The fund can only lend its resources to countries, and cannot use these resources to intervene in bond markets directly."

He said that "any alternative lending modalities to what we do now would require a different legal structure" for the IMF and added that such changes had not been discussed with the fund's members.

In his original comments Wednesday, Borges had also wanted the eurozone's bailout fund enlarged and given new tools, such as the power to guarantee bond issues from struggling countries, or to stand behind the European Central Bank to prevent possible losses on purchases of shaky government bonds it has made so far.

The IMF has said as much as200 billion ($279 billion) may be needed to boost banks' capital buffers, although some of that money could come from private investors.

"We're not saying that banks are weak, we're not saying that banks are in trouble," said Borges. "We're simply saying that no banking sector in the world can survive a general loss of confidence."

The IMF has so far contributed close to 80 billion ($112 billion) to eurozone bailouts, about a third of the total, but has never intervened in open markets.

"We have a whole set of options that could be put on the table to restore confidence in those countries," Borges said at a news conference in Brussels.

Greece has said it will start running out of money to pay salaries and pensions in mid-November if it doesn't get the 8 billion ($11 billion) instalment of its first 110 billion ($154 billion) bailout.