Brussels, 07/10/2011 (Agence Europe) - Steaming full speed ahead amidst the crisis surrounding Franco-Belgian bank Dexia, the talks about recapitalising European banks are looking at getting the EFSF bailout fund involved immediately to provide loans to shore up struggling banks. The idea is backed by the European Central Bank and France, but not the other AAA-rated eurozone nations like Germany. Ten days ahead of the European Council (17-18 October) which will be examining how to boost economic governance, the French President, Nicolas Sarkozy, will be visiting Berlin on Sunday for preparatory talks with the German Chancellor, Angela Merkel and much will hang on that meeting.
Hard to believe now that it was only at the end of the summer break that the European Commission firmly rejected comments by the newly appointed head of the IMF, Christine Lagarde (former French economy minister), that European banks needed urgent recapitalisation! The problems facing Dexia, the first bank to fall under pressure from the sovereignty debt crisis, have convinced Europe that action is needed to shore up lending institutions. The Commission wants the action to be as coordinated as possible and to respect EU state aid rules, although decision-making powers lie in the hands of the member states. A Commission spokesperson said on Friday 7 October that if further recapitalisation is required on top of that identified by the stress tests, then it must be done in a coordinated manner because it makes no sense for each to act alone.
Next week, the Commission will be unveiling a range of options and practical details about how the recapitalisation process might be arranged. It points out, however, that European banks must turn first and foremost to the money markets. If that does not suffice, then they can make us of financial backstops in the member states or even the EFSF (once the 17 eurozone nations have ratified the changes to the powers of the EFSF). The ratification process is expected to be completed ahead of the European Council. Slovakia will be deciding on Tuesday.
The powers of the EFSF have been increased so that it will be able to lend cash to bail out banks, but only as a last resort, explained EU Economic and Monetary Affairs Commissioner Olli Rehn on Friday, confident that the AAA-rated countries and most eurozone nations would be able to flood cash into their banking systems via the markets or their own cash without requiring handouts from the EU. The Finnish prime minister, Jyrki Katainen, said that money from the EFSF must not be one of the first solutions. German Chancellor Angela Merkel, believes member states with sufficient resources to bail out their own banks should take action nationally.
France does not agree. Big French banks like BNP Paribas and Société Générale have seen their share value halved recently due to exposure to struggling countries' sovereign debt and, with the collapse of Dexia, Paris fears that bailing out French banks itself would increase the French public debt and therefore jeopardise its AAA credit rating. A downgrading of France's credit rating would impact badly on the government, only months ahead of the presidential election.
France is therefore calling for aid to be provided by the EFSF in order to avoid damaging the ratings of individual countries. French Economy Minister Francois Baroin said the EU fund should be there to help countries that want to recapitalise their banks. After the final meeting of the ECB under his chairmanship, Jean-Claude Trichet said on Thursday that banks should clean up their balance sheets and call upon the EFSF if necessary. French newspaper Le Monde reports that France rejects the idea of writing off public debt, which would amount to a technical default by Greece, Spain or Italy.
The IMF said that Europe will need to find an extra €100 to €200 billion for its banks.
On Saturday 8 October, French President Nicolas Sarkozy will be meeting with the IMF Director General Christine Lagarde in Paris to discuss preparations for the G20 Summit in Cannes in November and the situation facing the eurozone. (MB/transl.fl)