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Saturday 20 January 2018

Debt Crisis: Ongoing chaos creates €300bn credit risk for European banks - IMF

Philip Pilkington

The International Monetary Fund today called for fresh bank capital injections in response to a €300bn credit risk in European institutions as a result of the debt crisis.

The call came as talks between the EU/IMF/ECB troika and the Greek government continued over €8bn in additional aid necessary to stop the country from defaulting on its debts.

Greece is expected to announce new cuts shortly including job losses in the public sector on top of already stringent austerity measures.

According to the IMF, while funding the banks privately is preferable, this capital injection should be made available through public channels if no others were available.

The IMF did not give an exact measure of the needed recapitalization but the recognized €300bn exposure by European banks to the debt crisis and called for further stress tests to measure exactly how much was needed.

Political infighting in Europe over ways to prevent contagion and delays in implementing already agreed upon measures are raising concerns about the risk of a potential defaulting sovereign, the IMF said in its Global Financial Stability Report which was released today.

Earlier this month the head of the IMF, Christine Legarde, was attacked by European officials for saying publicly that recapitalisations of certain banks were required.

European officials stood by the figures that were arrived at by stress tests undertaken in July that found only eight banks in need of recapitalisation, totalling only €2.5bn.

The IMF's report today indicates that, as many analysts suggested at the time, the bank stress tests were far off the mark and may have been subject to political pressure.

Yesterday the Washington-based IMF slashed its growth forecast and predicted severe repercussions if the European debt crisis was not dealt with.

Meanwhile, investors are also looking to the US where the Federal Reserve is expected to announce new packages designed to boost growth.

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