CRASH 2: Merkel lays it on the line: take a bigger haircut, and we’ll help recapitalise the banks.

German Chancellor Angela Merkel this afternoon said sovereign lenders may have to take deeper losses as part of a Greek rescue.  She said it in the same sentence as she signaled Germany’s readiness to join efforts to recapitalize banks.

While the Finance Ministers were busy air-castling over in Luxembourg, as advertised Merkel held talks in Brussels with European Commission President Jose Barroso. On arrival, Frau Merkel told reporters times was running out to recapitalise eurobanks, but that “if needed, there will be an adjustment” in investors’ share of a 159 billion-euro ($212 billion) second aid package for Greece.

You don’t have to be a rocket scientist to spot the deal here: take a closer haircut, and we’ll help recapitalise in the euro banking system. As much as anything, it’s one final olive branch to the Americans and French: ‘Cough up more like 50% than 20% to the hairdresser, and we’ll help stop contagion and rescue Paris.’

Merkel said that she supports recapitalizing European banks “if there is a joint assessment that the banks aren’t adequately capitalized” and finance officials develop “uniform criteria.” Germany is ready to discuss possible bank aid at this month’s EU summit, she said.

I’m told by someone who was there that Merkel didn’t display much enthusiasm. I also doubt very much if the banks will go for what is, in essence, a minor variation on what the German leader’s theme has been for several weeks.

If I’m giving the impression to some German readers that I am opposed to Frau Merkel’s behaviour, then I apologise. I think she wants to do the right thing by Europe’s citizens. But I don’t think she’s going to get it: and I’m increasingly sure that pressure is growing upon her to cut the Greek rope, or leave the eurozone, or both.

Related: The importance of being urgent.