Europe is breathing easier after Slovak parties agreed to hold a new vote on revamping the eurozone's debt rescue fund and the EU pressed banks to urgently beef up their coffers against the crisis.
Under pressure from European partners to vote again on Wednesday, a day after its parliament rejected an overhaul of the European Financial Stability Facility (EFSF), four key parties struck a deal to adopt it in a second roll call by Friday.
"We have reached an agreement on securing the adoption of the most important document of this period, the EU bailout fund," said Robert Fico, leader of the left-wing Smer-SD opposition party.
In return for a new vote, the centre-right government of Prime Minister Iveta Radicova agreed to hold snap elections on March 10. Her coalition collapsed with the "no" vote on Tuesday after a key partner refused to support the EFSF.
EU powers had pressed Slovakia to hold a new vote in the wake of warnings from the United States and China for Europe to get its house quickly for the sake of a weakening global economy.
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"The world economy is heavily affected by the financial crisis and every EU country must contribute its share to the fight against the debt crisis," German Chancellor Angela Merkel said during a visit in Vietnam.
She also said she was confident the expanded bailout fund would be ratified this month. The EU holds a summit October 23 focused on finalising its crisis response ahead of a G20 meeting in early November.
With the unrelenting crisis now threatening Europe's banking system, European Commission president Jose Manuel Barroso said on Wednesday that banks "urgently" need to recapitalise to weather the sovereign debt storm.
Banks that fail to do so should be barred from distributing bonuses and dividends, he said.
Barroso warned that EU leaders will meet next week "against the backdrop of urgency over the threat of systemic crisis now unfolding."
Barroso said banks should first try to tap the private market to beef up their capital, with support from governments if necessary. If such support is unavailable, the EFSF, once it is ratified, could provide loans.
He did not give a figure but a European source said the commission wants bank to raise their core capital to 9.0 per cent.
France and Germany have pledged to agree a plan to shore up banks by the end of the month but have not given any details as yet.
The European Banking Authority backs in principle the idea that banks should raise their core tier one capital ratios to 9.0 per cent, the Financial Times reported. Lenders would be given six to nine months to act or face government recapitalisations, the FT said.
European Central Bank chief Jean-Claude Trichet called for "clear decisions" from European leaders on Tuesday, saying there was a systemic risk.
Eurozone leaders agreed in July to boost the EFSF's powers in the hope of stemming the fallout from the eurozone's sovereign debt crisis, which now threatens the entire euro project.
Slovakia is the only country in the 17-nation eurozone to have rejected the changes to the 440 billion euros ($A605.73 billion)- rescue fund that was set up to shore up distressed nations after Greece was bailed out in May 2010.
Until all 17 nations pass the deal, the fund has an effective firepower of around 250 billion euros, an EU official said, with billions already committed to Ireland and Portugal while Greece is looking for a second bailout.
The new-look EFSF would be able to inject money into shaky banks or intervene instead of the European Central Bank (ECB) to support weaker eurozone countries facing problems in raising fresh funds on the markets.
Greece faces the acutest problems in rolling over its mountain of debt as financial markets fret over a potentially disastrous default and contagion spilling over into the rest of the eurozone.
Athens won a reprieve on Tuesday when the EU and IMF concluded a drawn-out audit of its budget program, paving the way for an 8.0 billion euro slice from the first, 110-billion-euro bailout it was granted last year.
