Merkel and Sarkozy are “confident that Greece’s future is in the Eurozone,” Merkel’s spokesman, Steffen Seibert, said in the statement. But he added that Greece must adhere to a “strict and effective implementation” of the conditions underlying the bailout of the country, including tight budget-cutting measures and efforts to increase tax revenue.
Sarkozy echoed that stand in a statement, saying Greece’s budget commitments “are indispensable for the Greek economy to find the path of sustainable and balanced growth.”
The emergency teleconference was intended to reassure fearful markets about Europe’s economic direction. It comes as Greece’s ability to pay its debts — and the future of its inclusion in the euro area — have appeared more in doubt than ever.
Greece stressed that it would meet the fiscal targets it agreed to. A government spokesman, Elias Mossialos, said after the meeting that the leaders had agreed that Greece is “integral” to the euro area.
Fears of Greek default — and a resulting brush fire of debt problems spreading across Europe — have soared in recent days, and members of Merkel’s fractious coalition have gone as far to say that Greece may need to drop the euro currency. But both Merkel and Sarkozy have said that they would take strong measures to support the nation’s finances.
Earlier Wednesday, concern about the debt crisis led Moody’s Investors Service to downgrade two major French banks and place a third under review.
The French banks probably have enough capital to deal with potential losses on their Greek holdings, Moody’s said in a series of reports, but have become increasingly vulnerable to a loss of confidence by the market. American money market funds — an important source of dollars for the banks — have been shying away from both Societe Generale SA and Credit Agricole SA since the crisis intensified over the summer, Moody’s said.
The ratings company downgraded Societe Generale from Aa2 to Aa3, and Credit Agricole from Aa1 to Aa2. It said it was keeping BNP Paribas at Aa2 for the time being, but all three banks face continuing review.
Moody’s said it does not expect the banks to be downgraded further by more than one notch, under current conditions. But Wednesday’s move underscores the way in which Europe’s economic troubles — originally a political problem — have started to become a banking problem as well, one that could spread outside the euro zone to the United States or Asia, or here to Russia.
The downgrades had been expected since last week but were not as severe as first thought. European and American markets were up on the hope that the crisis might be averted after all. On Wednesday stock prices rose in France and throughout Western Europe in response. France’s CAC 40 index closed up 43 points, or 1.9 percent, while Britain’s FTSE 100 rose 53 points, or 1.02 percent. Germany’s DAX surged 174 points, or 3.4 percent.
Markets in the United States wavered between gains and losses in the morning but made solid advances in the afternoon. The blue-chip Dow Jones industrial average finished the day up about 141 points, or 1.3 percent, and the broader S&P 500 index rose 16 points, or 1.4 percent. The tech-heavy Nasdaq advanced 40 points, or 1.6 percent.
The euro was trading at about $1.37 against the dollar.
Moody’s also took note of the banks’ exposure on Spanish, Irish and Italian loans, again pointing out that they should have sufficient capital to address potential problems but nonetheless face what may be a greater threat in negative market reactions to Europe’s continuing debt difficulties.
The ratings company noted that the French government can be expected to provide a high level of support for the banks if they run into liquidity troubles — but said that support will not be limitless.
Politicians in Germany’s ruling coalition continued to squabble with one another this week about the best way for the euro zone’s largest economy to handle Greece’s debt troubles.
Merkel has signaled plans to continue supporting Greece, saying earlier this week that the crisis was “historic” and that she feared a “domino effect” were Greece to be allowed to default. But her pro-business junior coalition partners have said the country may need to default on its debts. German politicians are being pressured by angry taxpayers, who have borne the main burden of the Greek bailout efforts. Philipp Roesler, the German economy minister, said Wednesday in Rome that Greece needed to show clear progress in shrinking its budget.
U.S. Treasury Secretary Timothy F. Geithner on Wednesday expressed confidence in Europe’s ability to wrangle its intensifying debt crisis.
Euro-zone leaders, he said in an interview with CNBC, “are absolutely committed, and they have the financial capacity, the economic capacity, to do what it takes to hold this thing together.”
Still, Geithner acknowledged, European leaders “recognize they’ve been behind the curve” in coming up with viable solutions to the problem. The Treasury secretary will visit Poland this weekend to attend a session of Europe’s Economic and Financial Affairs Council, known as Ecofin.
But World Bank President Robert Zoellick chastised European and U.S. leaders Wednesday for what he called their slow response to problems that have put the global economy at risk.
In an address ahead of the bank and International Monetary Fund meetings next week, Zoellick said leaders of the 17-nation euro zone were lax in insisting they could share a currency without making the tough political choices needed to make such a union work.
The euro area has been hobbled by problems known for years but ignored by Europe’s political leadership. Chief among the issues: the lack of any central power to keep countries such as Greece from running up massive debts that now threaten the region with a broader financial and economic crisis.
“It is not responsible for the euro zone to pledge fealty to a monetary union without facing up to either a fiscal union that would make monetary union workable or accepting the consequences for uncompetitive, debt-burdened members,” Zoellick said in prepared remarks delivered Wednesday morning at George Washington University.
The World Bank focuses on financial support and development assistance for the world’s more vulnerable countries. But Zoellick in recent weeks has been particularly critical of developed-world policymakers. In July, the former Bush administration official launched a pointed criticism of President Obama’s trade policy.
He said in his Wednesday speech that the United States was also risking other nations’ prosperity by its inability to address its deficits.
“It is not responsible for the United States to falter in facing fundamental issues such as unsustainable growth in entitlement spending, the need for a pro-growth tax system, and a stalled trade policy,” Zoellick said. “Unless Europe, Japan and the United States can also face up to responsibilities, they will drag down not only themselves but the global economy.”
Englund reported from Moscow. Schneider reported from Washington.