EU agrees new bank stress tests

European finance ministers inched forward towards beefing up the euro zone's rescue fund and preparing new stress tests for the region's shaky banks, dashing market hopes of quicker action.

The sluggish approach could test the patience of investors, spooked by the euro zone debt crisis, who sold off peripheral euro zone bonds this month until the European Central Bank intervened to steady markets.

Ministers of the 17-nation currency area explored ways to raise the effective lending capacity of their financial backstop but reached no conclusion, and they remain locked in dispute on tougher criteria for checking banks' ability to resist shocks.

The risk premium on 10-year Portuguese and Irish government bonds rose as traders took stock of the news, or lack of news, from Brussels.

The crisis-fighting measures seem likely to be agreed in a package deal at a European Union summit on March 24-25th, and the stress test results may not be published until July, sources from the EU's Hungarian presidency said.

"That's a long wait, for Spain particularly, given the cloud of uncertainty hanging over its banking sector," said Kenneth Wattret, chief euro zone economist at BNP Paribas in London.

Dutch finance minister Jan Kees de Jager said euro zone ministers had rejected the idea of increasing outright the European Finance Stability Facility, meant for euro zone states shut out of credit markets, from €440 billion.

German Finance Minister Wolfgang Schaeuble accepted that the full amount earmarked for the EFSF should be available for lending, rather than the far smaller amount accessible now. But he said that would be part of a comprehensive package in March including stricter budget discipline, structural reforms and closer economic policy coordination.

The €440 billion was the initial sum agreed to by euro zone countries when the EFSF was set up in May 2010, but it later turned out that because of the need to secure a triple-A credit rating, its effective lending capacity was much smaller.

Markets want to see more money available for the fund because they estimate the current amount would not be sufficient if both Portugal and Spain applied for emergency financing.

EU ministers agreed in principle to go beyond last July's flawed stress tests, which failed to expose Irish banks' frailty, and conduct tests for liquidity as well as solvency.

But details of the method, and how much data will be made public, remain to be agreed, officials said.

"We need to learn all the lessons of the first two rounds of stress tests and we need to make these more robust and more credible," EU Internal Market Commissioner Michel Barnier said.

Hungarian presidency sources said the new, tougher tests on banks' ability to withstand financial shocks should be conducted by the end of May, with results released in July, but other officials said the timetable had yet to be finalised.

Mr Schaeuble accepted the principle of testing liquidity, which Germany has previously resisted, but said it was not yet clear whether those findings would be made public.

The tests will encompass many of the same 91 banks as last year with a tougher methodology, covering both trading and banking books, and searching tests of core tier 1 capital.

The new European watchdog said last week it planned coordinated tests of banks and insurers in the first half of the year, with conclusions published in mid-2011.

Euro zone finance ministers explored ways to strengthen the region's bailout funds at their monthly session on Monday evening, but as expected came to no agreement.

Eurogroup chairman Jean-Claude Juncker said they discussed many options, but favoured none. Schaeuble said now markets were calmer there was no urgency about boosting the EFSF.

Greece, the first country to receive an EU-IMF bailout last May, swiftly quashed a suggestion by maverick deputy prime minister Theodore Pangalos that it extend repayments of its entire outstanding debt.

Many economists believe Athens will eventually have to restructure its debt but a Greek government spokesman said Pangalos had expressed "a personal, political view" and Athens was not discussing extending the repayment of its total debt.

Mr Juncker said the euro zone ministers discussed in general terms the possibility of reducing the interest rates charged on rescue loans to Greece and Ireland, and lengthening the maturity on Greece's €110 billion emergency package. That would make up part of the comprehensive package to be delivered, he said.

The euro rebounded in European trading, jumping above $1.3400, after sliding in Asia as hopes were dashed for an immediate agreement to increase the size of the bailout fund.

Analysts said they were concerned the euro zone was veering away from early action now that bond markets were temporarily calmer following successful debt auctions by Portugal and Spain.

"What indications we have heard from European officials over the past several days is that they just don't feel the same sense of urgency that the market does," said Todd Elmer, currency strategist at Citi in Singapore.

Reuters