PARIS/LONDON It may look schizophrenic, but European governments are simultaneously contemplating making banks take a bigger write-down on Greek debt, taxing their financial transactions and boosting their capital base.
There are strong political reasons behind this seemingly contradictory approach: aiding banks with taxpayers' money is political dynamite across Europe and needs to be handled with extreme care.
European leaders are walking a fine as they try to prevent a systemic banking crisis that could plunge the continent and the world back into recession, while avoiding political suicide by being seen to bail out the financial sector again.
This week's near collapse of Franco-Belgian municipal lender Dexia, weighed down by Greek and other peripheral euro zone debt as well as toxic U.S. sub-prime securities, highlights the dangers and the potential cost to the taxpayer.
In the minds of many voters from Bordeaux to Berlin, it was banks that got us into this mess in the 2008 financial crisis, and they should be made to pay.
The online campaign organization Avaaz says it has received more than 430,000 electronic signatures in less than a week on a petition denouncing the current EU/IMF rescue for Greece as a hidden subsidy to financiers.
"The bailout deal must be rewritten to ensure that public money serves the public interest and doesn't reward the banks and speculators which have helped caused the crisis," says the petition addressed to European Union leaders.
In France, contenders for the opposition Socialist party nomination in next year's presidential election have been vying with proposals to tax, control and break up the banks.
Arnaud Montebourg, an up-and-coming Socialist, advocates levying 250 billion euros from the financial sector in the euro zone and putting banks under "tutelage," with state directors in the boardroom, to force them to fund the real economy.
Public indignation against bankers explains the vocal drive by two conservative leaders, German Chancellor Angela Merkel and French President Nicolas Sarkozy, for a financial transactions tax in Europe -- a measure previously championed by the anti-globalization far-left.
Cynics suspect they may be counting on a lack of unanimity in either the 27-nation EU or the 17-member euro zone to ensure that no such measure comes to pass.
The backlash against banks is also taking the form of much tougher capital requirements and regulation that will reduce their return on equity and, with a lag, bankers' pay.
Governments across northern Europe, led by Germany, sought to assuage voters' anger over the cost of bailouts for Greece, Ireland and Portugal by insisting in July that the financial sector share the burden of a second rescue package for Athens.
With Greece sinking deeper into recession and missing its fiscal targets, some ministers are now pressing for the private sector to take more than the agreed 21 percent write-down, or for debt restructuring to be mandatory instead of voluntary.
The deal negotiated with the Institute for International Finance banking lobby was larded with publicly-funded "credit enhancements" to sweeten the deal for investors, including hedge funds that bought Greek debt at a discount and stand to profit.
Yet the bigger the "haircut" imposed on private bondholders, the greater the need will be for fragile banks to raise more capital, much of it from the public sector given the depressed levels of bank shares.
So taxpayers are set to pay one way or another, and European leaders have little time to figure out how to make that politically acceptable to their electorates.
"TIME IS OF THE ESSENCE"
"The financial sector problems are becoming ever more apparent and that is increasing pressure on policymakers," said James Ashley, senior European economist at Royal Bank of Canada in London.
"To some extent we are seeing markets forcing the pace, and that is why the need for urgent action is ever more apparent."
So far, opposition from Britain and Germany in the name of national sovereignty has blocked efforts to give the European Banking Authority power to assess banks' capital needs and order recapitalization where required.
Merkel squelched a French idea early in the 2008 financial crisis for a European bank rescue fund, arguing there was nothing wrong with German banks. The next day, she had to arrange an emergency rescue of a big German mortgage lender.
Now even the German chancellor accepts that recapitalizing Europe's banks is a matter of urgency.
"Time is of the essence," she said at European Commission headquarters on Wednesday, suggesting EU leaders could discuss a plan at a summit on October 17-18. Other experts said the Europeans needed to find a joint approach before a Group of 20 major economies summit in Cannes, France, on November 3-4.
When policies become too unpopular at a national level, the response is often to seek political cover by making them into a European initiative.
Experts such as Nicolas Veron of the Bruegel economic think-tank argue that Europe's banking crisis predated the sovereign debt crisis and the two have now become intertwined in a way that threatens financial stability.
Along with U.S. economist Adam Posen, now a member of the Bank of England's monetary policy committee, Veron proposed in 2009 a Europe-wide triage system to identify banks' capital needs and provide a framework for recapitalization.
Veron says euro zone governments should create a European Resolution Trust Corporation to conduct an objective capital assessment based on consistent criteria, which is where he says two rounds of EU-wide bank stress tests fell short, because national regulators applied different standards.
"You need to set up a temporary entity that does the dirty business of clearing up the mess," he said in an interview. "Once we announce that we are going to do that, the market is ready to wait a couple of months if there is a process under way."
Other analysts are not so sure Europe can wait that long and argue that only decisive action by the European Central Bank, or the unlikely prospect of euro zone governments agreeing to joint debt issuance, can prevent a systemic crisis.
"The only two options that will work to stem this systemic crisis now are an open-ended commitment by the ECB to do 'whatever it takes' to support sovereigns or a swift move toward Eurobonds issuance," said Sony Kapoor, managing director of the economic think-tank Re-Define.
"Everything else is likely to fall short."