German Chancellor Angela Merkel and French President Nicolas Sarkozy are convinced that Greece's future is within the euro zone, Mrs. Merkel's spokesman said after the two leaders held a three-way conference call with Greek Prime Minister George Papandreou.
But Mrs. Merkel and Mr. Sarkozy also stressed during the call the need for Greece to put into practice in a strict and effective way the already-agreed measures of its austerity program under a current bailout package, the spokesman, Steffen Seibert, said.
"That is a prerequisite for the payment of future tranches of the program," Mr. Seibert said. "The Greek prime minister has reaffirmed the absolute determination of his government to take all necessary measures to put into practice given commitments in its entirety."
That is also necessary for a return of the Greek economy to sustainable growth, Mrs. Merkel and Mr. Sarkozy agreed, according to the spokesman's statement. The two leaders also said that in order to guarantee the stability of the euro zone, it is essential to put into practice the decisions taken by euro-zone leaders at a July 21 summit.
The leaders then agreed to widen the scope of the euro zone's current rescue fund, the European Financial Stability Facility, to give it powers to buy bonds in the secondary market. Earlier, they had decided to widen the facility's actual lending capacity to €440 billion ($602 billion). Both measures still are pending approval by some European parliaments, among them Germany's Bundestag.
Earlier, the French government said it was ready to do whatever it takes to rescue Greece, as it urged the debt-laden euro-zone member to swiftly implement a July 21 plan to prevent a possible bankruptcy.
The moves came after ratings company Moody's Investors Service Inc. downgraded two major French banks, Crédit Agricole SA and Société Générale SA, and extended its credit watch on BNP Paribas SA.
"The president and the prime minister have repeated in unison France's determination to do whatever it takes to rescue Greece," French government spokeswoman Valerie Pecresse said after the weekly cabinet meeting. "We must implement...the accord of July 21, all of it, and as quickly as possible."
The political scramble to avoid a Greek default received support from U.S. Treasury Secretary Timothy Geithner, who said European officials won't allow a Lehman Brothers-like collapse to plunge the region further into crisis.
In an interview with CNBC, Mr. Geithner said Europe has the financial capacity to address the spiraling sovereign debt and banking industry concerns. "I think they recognize how severe the challenges are right now and I think they recognize they're going to have to do more to earn the confidence of the world," Mr. Geithner said.
Under pressure from its European partners, Greece's cabinet decided last week to step up structural reforms, including a plan to drastically slim down the public sector and sharply cut civil-service wage benefits.
That was followed by a separate cabinet decision Sunday to implement a new property tax in order to cover a €2 billion shortfall in Greece's deficit targets for this year.
Ms. Pecresse, who is also France's budget minister, said the plan, agreed on by euro-zone leaders in Brussels two months ago, should be implemented "in its integrity, and with all its counterparts."
Greece's government is scrambling to cut public spending and step up its lagging reform drive amid ultimatums from other euro-zone governments that further rescue money will be withheld if Athens doesn't deliver.
This month, talks between the Athens government and officials from the European Commission, the International Monetary Fund and the European Central Bank—the so-called troika that assesses the country's eligibility for fresh aid—were suspended in a dispute over whether Greece would need to take further measures. Without the aid, Greece says it will run out of cash by the middle of October.
In another sign of the challenges that could slow the response to the crisis, an Austrian parliamentary committee decided to postpone a decision to expand the European bailout facility designed to help financially troubled countries in the euro zone. Austrian lawmakers said they needed more time to debate the issue, delaying the vote until October.
Ms. Pecresse addressed issuing euro-zone bonds, a step described by many as the most radical solution to sovereign-debt problems in the currency bloc. She said the move requires that all member countries first bring their public finances under control.
"Euro-zone bonds are for us the end of a process of consolidation in the euro zone because sharing debt also requires the convergence of our budget policies," she said, adding that there is a growing consensus in the euro zone to cut deficits and pass budget rules that would force governments to rein in spending.
Despite the ratings downgrades, Ms. Pecresse insisted that French banks are sound and that their ratings remain "very good" compared with other euro-zone banks.
"The market fears are largely exaggerated," said the official statement routinely released by the presidency after the cabinet meeting. "French banks are sound."
Shares in the country's biggest lenders have fallen significantly since the beginning of August. SocGen and BNP Paribas shares have lost about a third of their value, while Crédit Agricole has fallen by more than a quarter.
Still, the government said it is "determined to act in the face of tensions on the financial markets," and public authorities are "determined to guarantee the soundness of the financial system."
The French government is determined to monitor the banks' efforts to strengthen their equity capital and will guarantee the soundness of the country's financial system, Ms. Pecresse added.
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