* Top German official says pessimistic on summit deal
* Geithner says encouraged, ECB role is central
* EU sources say ECB fully involved in drafting summit plan
* Figures highlight banks' massive ECB borrowing
* Summit chair wants bigger EU rescue fund with bank licence
By Emmanuel Jarry and Annika Breidthardt
PARIS/BERLIN, Dec 7 Pessimistic comments
from EU paymaster Germany and new figures exposing deepening
stress among Europe's banks dented financial market hopes of a
turning point in the euro zone's debt crisis at a summit this
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 on Wednesday.
Merkel also spoke by telephone with U.S. President Barack
Obama, agreeing on the need to find a lasting and credible
solution to the crisis, the White House said.
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 euro
zone sovereigns for the relative safe haven of the region's
strongest sovereign, Germany.
ALARM IN WASHINGTON
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.
Geithner underlined the European Central Bank's central role
in fighting the crisis, speaking again to ECB President Mario
Draghi by telephone just a day after they met in Frankfurt.
"I have a lot of confidence in what the president of France
and the minister are doing, working with Germany to build a
stronger Europe," Geithner told reporters after talks with
French Finance Minister Francois Baroin.
"Neither Nicolas Sarkozy nor Angela Merkel will leave the
negotiating table of this summit until there is a powerful
deal," Baroin told Canal+ television.
Euro zone sources said the ECB was closely involved in
discussing plans for tighter euro zone fiscal and economic
integration before the summit, and Draghi would meet Merkel and
Sarkozy in Brussels on Thursday evening.
Draghi signalled last week that a euro zone "fiscal compact"
could enable the ECB to act more forcefully. The sources said he
wanted a firm commitment set in stone that euro zone countries
were moving towards a fiscal union before stepping up
NO G20 DEAL
In Ottawa, Finance Minister Jim Flaherty repeated Canada's
position that European countries had sufficient resources to
solve their own problems, and said the International Monetary
Fund should concentrate on helping poor nations.
Japan's Nikkei newspaper reported in its online edition that
the Group of 20 advanced and emerging economies planned to put
together a $600 billion IMF lending facility for the euro zone,
with contributions from leading members such as Japan, the
United States and China.
But Flaherty said there was no such agreement. "There have
been discussions for some weeks about IMF resources and the
possibility of increasing IMF resources," he told reporters.
"There are some nuances to the positions of some countries,
but I assure you there has been no commitment by the G20 to any
specific resourcing plan," he told reporters.
An IMF spokesman also denied the Fund had been involved in
talk on such a lending facility.
Figures released on Wednesday showed just how urgently some
European banks need help.
Italian banks had to borrow 153.2 billion euros in emergency
liquidity from the ECB in November, up from 111.3 billion euros
at the end of October, Bank of Italy data showed, another big
leap in reliance on the central bank which has almost quadrupled
since June, when Italian lenders took 41.3 billion euros.
Euro zone banks took more than $50 billion in the ECB's
first dollar funding operation since the world's leading central
banks agreed last week to cut their cost, five times the $10
billion forecast in a Reuters poll of money market traders.
And Germany is set to reactivate a bank rescue fund created
at the height of the 2008 financial crisis at next week's
cabinet meeting, a government official said.
The ECB's governing council holds a crucial meeting on
Thursday, before the EU summit, at which most economists expect
it to cut interest rates to 1.0 percent from 1.25 percent,
introduce longer-term liquidity tenders for banks and widen the
collateral they can use to borrow from it.
Ratings agency Standard & Poor's heightened the sense of
crisis this week by warning it could cut credit ratings across
the 17-nation currency bloc, including for its EFSF rescue fund,
a move that would fundamentally weaken it.
A Reuters poll of 13 economists found 11 expect France to
lose its top-notch AAA credit rating within three months, a
potential blow to Sarkozy's re-election bid.
NEW IDEAS BUBBLE
Two days before the summit, new ideas bubbled about how to
boost the euro zone's crisis capabilities. EU officials said
leaders could decide to raise the combined lending limit of the
temporary EFSF rescue fund and its successor, the permanent
European Stability Mechanism, which France and Germany want
introduced a year early, in 2012.
But the German official said he could not foresee running
the two funds simultaneously. He also ruled out issuing common
euro zone bonds as a longer-term solution or letting the ESM
operate as a bank and borrow money from the ECB.
The Franco-German letter to Van Rompuy, who will chair the
meeting of 27 EU leaders, went beyond the treaty change proposal
announced on Monday.
Merkel and Sarkozy called for a new EU fast track for
progress on creating a common corporate tax base, a financial
transaction tax and labour market regulations -- ideas that are
anathema to EU members such as Britain and Ireland.
"A new common legal framework, fully consistent with the
internal market, should be established to allowing for faster
progress in specific areas," the letter said.
The framework should also cover financial regulation, growth
supporting policies and more efficient use of European funds in
the euro area, they said.
One key uncertainty hanging over the summit is whether the
EU treaty can be changed quickly to strengthen budget control.
Van Rompuy says tighter budget oversight sought by Paris and
Berlin for the euro area could be achieved quickly by tweaking a
protocol to the EU treaty that would not require full
ratification procedures in many countries. The
German official dismissed that idea as a "trick".
Sarkozy and Merkel want treaty changes to be agreed in March
and ratified before the end of 2012. If some countries block
treaty change for all 27 EU members, the 17 euro states could
proceed with an agreement on their own.
But a senior EU official said: "We're not going to save the
euro if the result of the summit ends up being a split Europe.
"A solution that does not involve all 27 states will be a
problem. It will show Europe divided, and the markets are not
going to like that."