EU meeting to tackle 'toxic assets' of banks

EU FINANCE ministers will meet today to try to agree a co-ordinated strategy to deal with “toxic assets” held by banks with an estimated nominal value of several billion euro.

They will also discuss what additional measures may be required to help stimulate the European Union economy, which faces its worst recession since the 1930s depression as the credit crisis shows few signs of abating.

French president Nicolas Sarkozy and German chancellor Angela Merkel called on EU states to tackle the “bad debts” on banks’ balance sheets in an effort to restore credit flows to European businesses. “Problematic assets would be an essential factor that would contribute to restoring confidence in the banking sector,” they said yesterday in a joint letter to the European Commission and the Czech Republic, which holds the EU presidency.

Mr Sarkozy and Dr Merkel said each EU member state should be free to choose its own strategy in dealing with toxic assets, but it stressed that governments needed to conform to agreed general guidelines to avoid introducing national remedies that could harm other economies sharing the EU’s internal market.

There is currently no standard response to the bad debt problem, which economist Nouriel Roubini – who predicted the credit crisis – has estimated will lead global banks to write off $3.6 trillion in debt. Some countries, including Britain, are setting up a type of insurance scheme for the toxic securities held by banks, while Switzerland has opted for a hybrid scheme by establishing a “bad bank” with a linked insurance scheme.

Last night, finance ministers from the 16 countries that share the euro currency discussed two reports – one authored by the ECB and the other by the EU executive – on how governments should deal with “toxic assets”. The ECB report advised policymakers that the most cost-effective way of dealing with the issue would be to combine a so-called bad bank with guarantees of securities. It also warned that the amount of illiquid assets on bank’s books would probably mount.

The commission report on toxic debt also suggested combining a bad bank and an asset insurance scheme. To control costs, “one could consider combining a bad bank approach and asset insurance whereby bad assets are transferred to a single entity which benefits in some way from a government guarantee,” said the commission’s report.

“This approach combines many of the benefits of the bad-bank approach from the perspective of restoring confidence in the banking system while limiting the budgetary impact.”

EU economic affairs commissioner Joaquin Almunia said yesterday that the critical issue was not the type of scheme but rather the criteria that governments agree to value “toxic assets”.

“Irrespective of whether action takes the form of a bad bank or an insurance scheme, what matters first and foremost is that we agree on which assets will be eligible and how to value them,” he said.

The big fear in Brussels is that if EU states adopt different criteria for valuing bad debts, it could lead to competition distortions as member states seek to artificially protect their national banks.