Banks set to get €200bn in case of Greek losses
Published 06/10/2011 | 05:00
EUROPE'S leaders, led by German chancellor Angela Merkel, are urgently putting together a plan to recapitalise eurozone banks after they have taken losses on loans to Greece and to provide for possible losses elsewhere.
A day of dramatic comments was topped by a statement, and later retracted, from the European head of the IMF that the organisation might buy Italian and Spanish government bonds.
Antonio Borges also said eurozone banks would need €100-200bn in fresh capital. "There has been a lot of talk about French banks, but ... the problem is very widespread," he said.
"No banking sector in the world can sustain a generalised loss of confidence and we need to restore that confidence all over Europe," he said.
As the prospect of a planned Greek debt restructuring loomed larger, Finance Minister Michael Noonan said in the Dail that the issue was not the euro, but who was inside and who was outside the eurozone
"The euro is as solid as a rock; the issue is who is in and who is out, and can everyone stay in?" Mr Noonan said.
He had stressed to his European colleagues that Ireland and other eurozone countries have to be protected from further contagion from Greece.
Ms Merkel raised the possibility of a bigger "haircut" for lenders to Greece, who have agreed to take losses of 21pc as part of a July voluntary bond swap and debt replacement plan.
"We have got to look at the current Greek figures and see whether that still fits," she said.
Finnish finance minister Jutta Urpilainen said euro countries were coming round to the idea that the July deal was "too advantageous for investors".
"This was discussed at Monday's euro group meeting (of finance ministers); how can we find a way to increase burden sharing? No solution has been put forward so far."
In extraordinary comments, Mr Borges, head of the Europe Department of the IMF, said the body could create a special financing vehicle to buy government bonds in the markets to help countries raise debt more cheaply.
This would apply mainly to Spain and Italy, which Mr Borges said have a problem of market confidence rather than solvency.
IMF bond market purchases would give an "additional element of credibility because of the conditionality the IMF requires," he said.
But shortly after, the IMF headquarters in Washington issued a clarification, Mr Borges withdrew the comments, saying the IMF can lend only to countries, and cannot use its resources to intervene in bond markets directly.
"Any alternative lending modalities to what we do now would require a different legal structure," he said.
Such changes had not been discussed with the fund's members.
The comments will still be seen as a signal of the kind of radical proposals which are under discussion, as will those of Mr Noonan. Markets rallied on the prospect of fresh capital for stressed banks.
Ms Merkel told reporters in Brussels that Germany was prepared to recapitalise banks facing losses. "We're under pressure of time -- we need to take a decision quickly," she said, adding that European leaders may discuss the issue at summit on October 17.
The new urgency follows the collapse of Franco-Belgian lender Dexia, which is to be restructured, with its loss-making toxic assets hived off in a €130bn government-guaranteed 'bad bank'.
The leader of the junior partner in the German coalition government, Philipp Roesler, travelled to Paris to present his plans to permit members of the eurozone to become "insolvent".
His Free Democrats have been more hostile than the opposition Social Democrats to the rescue plans proposed so far. His insolvency scheme would see a 'European Monetary Fund' take over control of select fiscal and economic policy in an insolvent state, substituting powers that lie with sovereign governments.
Other tools would include negotiating new terms with investors on bond repayments and selling states' assets.
Ms Merkel also said that changes to the Lisbon treaty might be necessary to boost European integration in future.