By John O'Donnell and Julien Toyer
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Against the worsening economic backdrop, European banks are finding it hard to borrow and are increasingly reluctant to lend to one another.
In an attempt to arrest this creeping credit freeze, ministers examined offering state guarantees to borrower banks on Tuesday but became bogged down in deciding whether to pool such guarantees in Europe or ask countries to go it alone.
"The point is to what extent you pool together guarantees for banks," said one official. "There are differences of views on that point."
Austria's finance minister and others said two schemes were now being considered -- one a common "harmonized" model of guarantees for banks that need to borrow and another a "consortium" where state guarantees for banks are gathered.
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"A collectivization of the guarantees at a European level ... everyone together ... Europe makes one guarantee pot ... was ruled out," Maria Fekter told journalists after the meeting.
BRIDGING A DIVIDE
A suggestion by the European Investment Bank (EIB) that its shareholders, which include all 27 EU states, pump in more cash so that it can lend more, also received a cool response, she said.
In that proposal, the EIB said it could lend up to 74 billion euros ($101 billion) to banks over two years if its shareholders, which include Germany and Britain, were to inject new capital.
The ministers also faced pressure to paper over cracks in a plan signed off by EU leaders to inject around 100 billion euros of extra capital into banks to protect them against the impact of a Greek sovereign default.
Michel Barnier, the EU official in charge of financial regulation, said he would write a law to empower supervisors to push banks that need to beef up their capital by curbing their dividend or bonus payouts.
His announcement comes amid doubts about the plan to boost banks that was set to cost more than 100 billion euros. Now countries including Italy want a more flexible approach to cut this bill.
Swedish Finance Minister Anders Borg hinted at divisions when he said earlier: "We should do what we have promised. Any watering down would be costly in terms of credibility. We should not change the criteria."
French Finance Minister Francois Baroin played down any talk of changing the plan.
"There is a deal," said Baroin, leaving the meeting. "There is no change on this from our point of view."
Amid indecision, the EU's attempts to support its lenders may be overtaken by events.
Recapitalizing banks was in part intended to cope with a default by Greece. But if debt-ridden Italy -- the euro zone's third biggest economy -- were also to need financial assistance, the scale of the problem would change entirely.
Yields on Italy's 10-year bonds touched a record high on Tuesday morning at 6.71 percent, close to levels widely seen as unsustainable.
"People were kind of hesitant and waiting developments in Greece and in Italy," said Irish Finance Minister Michael Noonan, leaving the meeting.
"There is a feeling, whatever economic and financial decisions need to be made can't be really made until the political logjam is released. People were kind of watching and waiting."
Ministers also abandoned talks on a financial transaction tax, an idea strongly backed by Germany but opposed in equal measure by Britain.
German finance minister Wolfgang Schaeuble said there had been a "lively" discussion and some disagreement.
Britain's George Osborne was more direct when he told the meeting: "I would suggest that we put to rest the idea that there is going to be some European financial transaction tax."
(Reporting by Jan Strupczewski, Robin Emmott, Annika Breidthardt, Julien Toyer, Francesca Landini, Ilona Wissenbach and John O'Donnell; Editing by Rex Merrifield, John Stonestreet, Catherine Evans, Ron Askew)