1. Euro zone Crises

1) Merkel, Sarkozy Pledge Bank Recapitalization in Next Crisis Plan

Angela Merkel and Nicolas Sarkozy, racing to stamp out the euro debt crisis threatening to engulf the financial system, gave themselves three weeks to devise a plan to recapitalize banks, get Greece on the right track and fix Europe’s economic governance.

German Chancellor Angela Merkel said European leaders will do “everything necessary” to ensure that banks have adequate capital, joining French President Nicolas Sarkozy to persuade investors they can stamp out the debt crisis roiling global markets.

At a joint press conference in Berlin, Sarkozy set a deadline of the Nov. 3 Group of 20 summit to deliver a response that addresses the immediate crisis in Greece and what he called the structural defects in the 17-nation euro area.

European leaders are coming under increasing pressure from international counterparts to end the debt contagion that President Barack Obama said last month was “scaring the world.”

Analyst Comment: Maybe they’re still running one step behind, but they are at least discussing the right things.

2) Merkel, Sarkozy Meet as Debt Crisis Threatens to Engulf Banks

German Chancellor Angela Merkel and French President Nicolas Sarkozy met in Berlin to discuss ways to staunch the European debt crisis threatening to engulf the region’s banks.

Merkel may be more willing to accede to French proposals to increase the flexibility of the EFSF in return for greater scope for a Greek debt restructuring, Welt reported. European Union leaders will also formulate a bank-recapitalization plan for the region in time for an EU summit scheduled for Oct. 17 and 18, the newspaper said.

3) Belgium’s Dexia Woes Echo Irish Bank Rescue Crisis: Euro Credit

Dexia SA’s collapse is driving up borrowing costs for Belgium, echoing Ireland’s predicament and presaging what other nations forced to provide yet more funds to their banks may encounter.

Fitch Ratings lowered its viability rating on Dexia to b+, or “highly speculative,” citing a deterioration of the bank’s access to funding.

Investors are selling Belgium’s bonds amid concern that any effort to rescue Dexia through a state takeover or guarantees for depositors will add to the national debt, raising the possibility the nation will have to seek an international bailout.

Analyst Comment: We had the rally, with Belgium following everyone else, but Dexia is leading them clearly down. Guaranteeing a certain amount of liabilities -- isn’t that where Ireland went? It’s never going to be the size of Anglo Irish but it is something that’s concerning the market in terms of what the underlying risk of the sovereign really is.

4) Dexia Breakup Nears as Belgium Seeks to Buy Consumer Unit

Dexia SA’s breakup gained momentum as Belgium got approval from France to buy as much as 100 percent of the Belgian consumer-lending unit, three people with knowledge of the talks said.

Analyst Comment: Dexia is not an isolated problem. The question for all investors in Europe is how politicians are going to handle this, and what they want to see is a coordinated and professional solution. That would be a good opportunity to restore calm.

5) Dexia Agreement Reached by France, Belgium as Bank’s Board Meets

France and Belgium reached an accord on Dexia SA as the lender’s board meets to approve the proposals, paving the way for a dismantling of the French- Belgian bank.

6) BNP, Societe Generale Deny Report That They May Seek Funds

BNP Paribas SA, France’s largest bank, and Societe Generale SA denied a report in today’s Le Journal du Dimanche that they may seek to raise billions of euros to shore up their capital as part of a Europe-wide plan.

2. Central Banks

1) Trichet Throws Away Script as He Reminds U.S. Euro Built to Last

“The overall picture when you look at the euro area as a whole is very, very different from the perception,” Trichet said in his Washington speech to a conference organized by the Bretton Woods Committee.

Trichet says that the euro-area’s strengths are too often “overlooked,” as are its similarities with the U.S., and he suggests the region’s monetary and fiscal policies are misunderstood. His argument resonates because naysayers were taking potshots at the euro even before it began trading in 1999.

2) Stevens Rate Cut Bets Smallest in Two Months: Australia Credit

European efforts to avert a banking crisis are reducing expectations for lower interest rates in Australia, bond market measures show.

Analyst Comment: The market has now got it into its head that there’s going to be some sort of solution. There are some serious headwinds playing out there, so I don’t really see the market moving away from pricing in rate cuts because the RBA is now talking about it as well.

3) Tumbling Rupiah May Force Indonesia to Delay Interest-Rate Cut

Indonesia will probably leave interest rates unchanged for an eighth month, after a tumble in the nation’s currency curbed scope for lower borrowing costs to bolster expansion as global economic growth weakens.

Analyst Comment: The currency’s fall is the reason they will leave the benchmark rate unchanged. But Bank Indonesia will have room to cut in December. We need low interest rates to support growth next year because the problems in the U.S. and Europe may affect Indonesian exports.