Brussels: Europe’s leaders were in difficult talks on Sunday to support those banks that have been asked to take huge losses on their Greek debt holdings, amid fears of a fresh banking crisis.

German Chancellor Angela Merkel (right) talking to French President Nicolas Sarkozy. Photo: AP.

To avoid this restructuring of recession-mired Greece’s debt from sparking havoc in the banking sector, finance ministers have asked lenders to bolster their capital reserves.

Banks would have to raise their tier 1 capital -- that is reserves which a bank can tap most quickly -- to 9% of their assets, with governments promising to plug the gap if they cannot do it on their own.

Lenders would first be expected to find the cash themselves, only resorting to national treasuries if necessary. Banks should not expect “freebies" from taxpayers, said Sweden’s finance minister Anders Borg.

However, while ministers and leaders hailed the deal -- which was clinched after overcoming objections from Italy, Spain and Portugal -- they acknowledged they still have to win the agreement of the banks themselves.

“We need to negotiate with the bank sector," said Belgium’s finance minister Didier Reynders after more than 13 hours of talks on Saturday.

Two-step talks in Brussels on Sunday -- first between the 27 European Union leaders, followed by the 17 nations sharing the euro -- will look at the deal expected to be finalised for a euro zone summit in Brussels on Wednesday.

But the head of the Institute of International Finance (IIF), a global association of top financial institutions, dampened expectations of a quick accord, saying progress was glacial.

“Discussions are making progress, albeit limited," IIF president Charles Dallara, in Brussels for the crisis talks, said in a statement.

“We remain open to explore options on a voluntary approach built on a realistic outlook for the Greek economy and restoration of Greece’s market access," he said.

In a draft statement to be adopted later on Sunday and obtained by AFP, leaders welcomed “progress ... on measures for the banking sector" and vowed to “finalise this work at its meeting of 26 October."

However, the statement makes no mention of the €108 billion figure and the International Monetary Fund (IMF) has previously estimated that nearly twice that amount would be needed to prop up the banks.

As if to highlight the urgency of the problem, heavily indebted Franco-Belgian lender Dexia earlier this month had to be rescued and restructured amid fears more lenders could follow, especially in France, Italy and Spain.

Banks in these countries are most exposed to Greek debt and credit ratings agency Moody’s warned on 17 October that it could downgrade France’s cherished triple ‘A’ rating due to concerns over its shaky banks.

Spain has already suffered three downgrades in the space of less than two weeks, as ratings agencies fear that rescuing the country’s banks will push Madrid’s debt pile up to unsustainable levels.