Europe’s fiscal cauldron continued to bubble over on Wednesday, with no respite in sight from credit rating downgrades and flailing banks, although bank stocks climbed on reports of a recapitalisation plan.
The International Monetary Fund’s Europe director, Antonio Borges, urged European governments to urgently recapitalise banks, warning a failure to do so could lead to a credit crunch that would destabilise the European Union when it is already at a crisis point.
Speaking to reporters here, Borges said the IMF would assist the EU if necessary, by joining the euro zone’s bailout fund to buy bonds from fiscally troubled governments. Any such move by the IMF, however, may face some opposition from emerging markets already concerned that the Fund is extending itself on too generous terms to Greece.
The IMF official’s statement followed a meeting of European finance ministers in Luxembourg, where bank recapitalisation plans were reportedly discussed. EU economic and monetary affairs commissioner Olli Rehn said, “There is a sense of urgency among ministers and we need to move on…The capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty.”
Borges also confirmed such a scheme was in pipeline, saying “it was no secret” European governments were working to bring “more public sector capital” to the banking sector.
But an EU spokesperson sought to dampen speculation that a plan had already been agreed to, telling reporters Rehn had only been referring to “discussions in progress” rather than any “concrete plan in hand”.
European bank stocks, however, responded positively to the news, with the beleaguered Credit Agricole SA and Dexia climbing mid-way through the day’s trading.
However, the fact that Dexia now requires a bailout from France and Belgium, three years after its last bailout in 2008 and only months after stress tests gave it a clean chit, is being seen as the first big sign of Europe’s crisis shifting from the periphery to the core.
The bank, which has large exposure to Greek debt, now plans to pool its troubled assets into a “bad bank”, with the Belgian and French government’s guarantees to protect depositors and its municipal-lending business, Yves Leterme, Belgium’s prime minister, said.
Meanwhile, credit ratings agency Moody’s downgraded Italy by three levels and placed it on a negative outlook, warning other euro area nations below triple-A ratings may see further cuts in their rankings.
Bloomberg reported Morgan Stanley analysts saying European banks may need more than euro 140 billion ($186 billion) of capital through a programme similar to the US Troubled Asset Relief Programme. Last month the IMF said in a report that banks in Europe may need as much as euro 300 billion.
Apart from bank recapitalisation, the other main preoccupation for Europe’s leaders continues to be the threat of a Greek default. Athens announced late yesterday it had enough money to last until November, which allows euro zone finance ministers more time to agree on the next tranche of Greek bailout funds. It is expected that when the ministers meet again on October 13 to discuss the second Greek bailout, a plan to force private bondholders to take bigger write-downs will be on the agenda.
