Fix banks to avoid eurozone meltdown, IMF warns

The Washington-based IMF stressed the importance of a new series of stress tests on banks The International Monetary Fund has warned that the eurozone debt crisis could spread across the region unless European countries step up efforts to fix their banks. In its latest economic outlook for Europe , the IMF said that the debt crisis in Greece, Portugal and Ireland could hit the wider eurozone by hitting bank lending and delivering a confidence shock, despite the rescue packages that are already in place. “Financial linkages between countries with sovereign debt troubles and the rest of Europe could potentially pose more risk to the outlook,” the IMF said on Thursday. “Restoring fiscal health, squarely addressing weak banks, and implementing structural reforms to restore competitiveness are key.” The Washington-based organisation stressed the importance of stress tests on banks, saying they are a key opportunity to force those found to be weak to raise new capital to bolster their finances. The European banking regulator is busy running a new round of stress tests and will publish the results in June. Tests conducted last year were regarded as too easy. The IMF estimates that the eurozone will grow by 1.7% this year, the same as in 2010, and 1.9% next year, assuming debt crises don’t derail the economy. It also expressed concern about Britain’s economic position. The UK faces “considerable short-term uncertainty, as growth turned flat in late 2010 – taking out temporary weather-related effects – and fiscal consolidation accelerates,” said the IMF. However, the drop in sterling and low interest rates should help mitigate the effects of the “sizeable” government spending cuts, it added. The report was issued just hours after Finland agreed to support a rescue package for Portugal. The Finnish finance minister said that Finland was prepared to sanction the €78bn (£67bn) aid deal, as long as Portugal started negotiations to persuade private investors to keep their funds in the country. Shocks could spread fast With banks in countries like Germany, the UK and France holding bonds from highly indebted nations, “a shock to confidence could spread quickly throughout Europe,” the organisation warned. A default or restructuring of Greek, Portuguese or Irish debt could hit those banks so hard they would have to cut lending to companies and threaten the European recovery. Morgan Stanley estimates that France’s BNP Paribas is the most exposed of the non-Greek banks to Greek debt, holding about €5bn of bonds, but fellow French bank Société Générale and Germany’s Commerzbank are also at risk. The IMF report said: “Restoring confidence in the euro area’s banking system is a prerequisite to turning the page on the crisis. The upcoming round of strong, broad, and transparent stress tests provides an opportunity to address remaining vulnerabilities. But to be effective, the stress tests need to be followed by credible restructuring and recapitalisation programmes. Efforts to strengthen the banking systems in vulnerable countries will need to accelerate.” European debt crisis IMF Economics Global economy European banks Banking Julia Kollewe guardian.co.uk

Posted by on May 12, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.