Germany pours cold water on EU summit hopes

 
City A.M. Reporter
Pessimistic comments from EU paymaster Germany and new figures exposing deepening stress among Europe's banks have dented financial market hopes of a turning point in the euro zone's debt crisis at a summit this week.

President Nicolas Sarkozy and Chancellor Angela Merkel detailed their plan to amend the EU treaty to anchor stricter budget discipline in the euro area in a letter to European Council President Herman Van Rompuy.

The French finance minister said the leaders of France and Germany would not leave Friday's European Union summit until a "powerful" deal is reached to restore market trust and prevent the sovereign debt crisis spiralling out of control.

But while Paris voiced determination, a senior German official gave a downbeat assessment of prospects for an agreement in an apparent effort to jolt partners into accepting Berlin's terms and respecting its red lines.

"I have to say today, on Wednesday, that I am more pessimistic than last week about reaching an overall deal ... A lot of protagonists still have not understood how serious the situation is," the official told a pre-summit briefing.

"My pessimism stems from the overall picture that I see at this point, in which institutions and member states will have to move on many points to make possible the new treaty rules that we are aiming for," he said, speaking on condition of anonymity.

The euro slipped, share prices turned negative and safe-haven German bond futures rose after the official punctured investors' hopes of a crisis solution, although some diplomats played down his comments as pre-summit brinkmanship.

After several days of recovery, Italian and Spanish bond yields rose sharply as money fled the two most endangered Eurozone sovereigns for the relative safe haven of the region's strongest sovereign, Germany.

U.S. Treasury Secretary Timothy Geithner, whose fourth trip to Europe in as many months speaks of the alarm in Washington at the damage the debt crisis could wreak on the U.S. economy, backed the Franco-German plan to impose mandatory penalties on euro states that exceed deficit targets.