European Union finance ministers Tuesday weighed ways to tackle the shaky assets on banks' balance sheets that have dried up lending and aggravated the recession.
The options include setting up a "bad bank" to buy assets dragging down banks' finances, or a government guarantee to cover massive potential losses, officials said.
Luxembourg Prime Minister Jean-Claude Juncker, who led talks Monday of the 16 euro zone finance ministers, said all 27 EU members would probably choose "a range of tools" enabling each country to pick the one they like best for its banking sector.
The U.S. is also planning to buy some of its banks' bad assets, building on last month's move to cover $118 million of Bank of America's toxic investments. Banks gorged on securities backed by risky U.S. mortgages, only to now find that the market for such assets has dried up.
Getting them off banks' hands would theoretically free up lending and restore the banking sector to some kind of normality because they would not have to hold back funds to cover massive potential losses.
French President Nicolas Sarkozy and German Chancellor Angela Merkel wrote a joint letter Monday to say restoring credit to the economy should be the top priority for the EU _ and dealing with problem assets would help restore confidence in the banking sector.
Alistair Darling, the British chancellor of the Exchequer, told reporters on arrival at the finance ministers meeting it was key for governments to jointly "do everything we can to get lending going again."
EU leaders are planning to meet this month to coordinate a patchwork of national stimulus programs that has led to complaints that some governments are moving to protect their industries from rivals.
Swedish Prime Minister Fredrik Reinfeldt said Monday he feared some aid might trigger protectionism. Last week, the Czech Republic criticized Sarkozy for suggesting a French-owned auto factory in the Czech Republic should be making cars in France.
EU regulators have warned France about insisting car makers only receive government help if they buy French car parts or invest in France _ a French effort to reverse a trend where car manufacturing jobs have shifted to lower-wage eastern European nations.
"People are right to be concerned about any form of protectionism," Darling said, urging a new effort in the stalled Doha round of world trade talks. "I hope President Obama will be able to give that an added impetus. We cannot have protectionism. We cannot have barriers to trade."
The letter from Sarkozy and Merkel also called on the EU to talk about when they should start reducing public debt. Many euro nations are slipping from budget surpluses into shortfalls as the economy contracts, depressing tax revenues and hiking welfare payments.
On Monday, Juncker cautioned that government spending to restore the flow of credit to the economy "could have a very serious impact on public finances."
"The right sort of treatment of toxic assets can help create stability," he told reporters after talks between euro zone finance ministers on Monday.
The EU's top economy official, Joaquin Almunia, said he wanted to see shareholders share some of the burden of bad assets and transparent methods to value the investments.
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Associated Press writer Robert Wielaard contributed to this story.
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