Pressure mounts on France and Germany

The eurozone debt crisis intensified last night after Spain and Italy – countries that are seen as too big to bail out – suffered another round of cuts to their credit ratings.

The decision by Fitch to cut Spain's credit rating by two notches to AA- and Italy's by one notch to A+ threatens to drive up the already elevated borrowing costs faced by the two countries, and will heap pressure on France and Germany to find a solution to the Continent's debt problems. "The crisis has adversely [affected] financial stability and growth prospects across the region," the agency said.

The move will hasten efforts by European officials to finalise plans to reinforce capital buffers at banks that are exposed to bonds issued by debt-laden countries, with Greece the focus of concern in recent days.

The German Chancellor, Angela Merkel, and the French President, Nicolas Sarkozy, are due to meet tomorrow to discuss the crisis before an EU summit starts on 17 October, but there are already signs that they have different opinions. A source in Germany indicated that France wanted to draw upon the revamped European Financial Stability Facility – the currency bloc's bailout fund – to shore up its banks. Berlin, however, wants the EFSF to be a last resort, preferring that lenders first attempt to raise capital on the markets instead.

The differences in opinion, denied by a source at the French finance ministry, came as Ms Merkel insisted the EFSF should be the last option for troubled banks that need to be recapitalised."The banks must first try to raise capital themselves. If that does not work then the member state should come up with instruments as we did in 2008-9, and only then when the country cannot cope on its own can the facility ... be used," she said following talks with the Dutch Prime Minister, Mark Rutte, yesterday. Tapping the bailout fund would involve conditions over reforms in the country in question, Ms Merkel added.

The European Commission is currently working on bank recapitalisation plans and will put forward its proposal in coming days, its spokesman, Olivier Bailly, said. He stressed the importance of co-ordinated action that reaches across the Continent, adding: "We need to do this with a European approach and we need to discuss the approach."

But while officials move towards recapitalisation, the head of the French bank Société Générale said shoring up banks was not the solution. "The main issue is a crisis of confidence in the sovereign," Frédéric Oudéa told the Reuters news agency. "What is important is to deal with the Greek debt issue as quickly as possible and then rebuild confidence in the capacity of each bank in Europe to reduce its debt. "My view is [that] the potential recapitalisation will not sort out the issue of confidence in sovereign debt."

Speaking a day after the European Central Bank proposed increasing liquidity for lenders, Mr Oudéa welcomed the move and said the problems with Greece were "manageable" for all European banks, including SocGen.