German chancellor Angela Merkel insisted today the euro zone rescue fund should only be used to prop up banks as a last resort, ahead of a weekend meeting with French president Nicolas Sarkozy.
The two leaders are expected to thrash out how to strengthen the region's banks at the meeting.
The €440 billion European Financial Stability Facility (EFSF) has been redesigned to help banks and buy up government bonds in an effort to beef up Europe's crisis fighting response.
Dr Merkel told reporters after talks with Dutch prime minister Mark Rutte that they had both agreed that, if recapitalisation were needed as now looks likely, this should be done according to a "hierarchy" of methods for raising the capital.
"The banks must first try to raise the capital themselves, if that doesn't work then the member state should come up with instruments as we did in 2008-2009, and only then when the country cannot cope on its own can the facility - the EFSF - be used," Dr Merkel said.
Receiving such aid from the EFSF would involve the country in question agreeing to conditions including a programme for structural reform, Dr Merkel added. "This will definitely be discussed at the next summit," she said.
She stressed that the "philosophy" behind the EFSF - which European leaders granted extra funding and powers to buy bonds and help banks in July - was to stress both solidarity with struggling euro states but also the "willingness to reform of states that receive aid".
A German source said earlier that France, whose banks are exposed to the sovereign debt of struggling euro states, wanted to use the EFSF to recapitalise its banks. The source called this a French "misunderstanding" of how the fund works.
However, a French finance ministry source later said there was no disagreement between Paris and Berlin over how to bolster the capital of troubled European banks.
Dr Merkel and Mr Sarkozy are under pressure from financial markets and Washington to settle their differences on how to use the euro zone's financial firepower to resolve the debt crisis threatening the global economy.
Both leaders have reaffirmed in the last week that a Greek debt default must be avoided because it would have potentially catastrophic consequences for the European and global economy.
Dr Merkel said European leaders were awaiting the findings of a team of EU and International Monetary Fund inspectors now in Athens monitoring its progress on reforms that are a condition for releasing an €8 billion aid instalment by mid-November.
Reuters
