Merkel backs need to rescue weak banks

INTERNATIONAL FINANCIAL CRISIS:GERMAN CHANCELLOR Angela Merkel has thrown her political weight behind the clamour to recapitalise the euro zone's weakest banks, an initiative which may cost EU member states as much as €200 billion.

Although the chancellor’s intervention helped spur markets, there was confusion yesterday when the IMF’s most senior official in Europe retracted his own suggestion that the fund might intervene in bond markets to help support Spain and Portugal.

Dr Merkel and other leaders have been resisting pressure for weeks to provide new capital for the beleaguered banking sector. Her move reflects mounting concern about the fragility of French and other banks and growing strains in inter-bank lending markets.

“Germany is prepared to move to recapitalisation. We need criteria. We’re under pressure of time, and I think we need to take a decision quickly,” the chancellor told reporters in Brussels.

Dr Merkel said she was willing to discuss capital infusions into Europe’s weakest banks at an EU summit on Monday week. Still in question, however, is whether France moves to support its banks.

Although Paris is known to have been seeking private investment, the government is cool on further state support for a sector in which the three main lenders have lost half their value in recent months.

A key concern here is that any big state recapitalisation of French banks could threaten the country’s triple-A credit rating. Amid frantic efforts to shore up the stricken Franco-Belgian lender Dexia, however, Dr Merkel’s public intervention has taken the debate to a new level in Europe. “There is no secret at all that European authorities and the European Commission are all working together on a plan to bring more official capital, more public-sector capital, into the banking sector,” said the head of the IMF’s European division, Antonio Borges.

Mr Borges, who estimates that banks need between €100 billion and €200 billion, said the situation has worsened a new round of stress tests during the summer. “The immediate problems are more about liquidity than solvency,” he said.

The IMF wants a “European approach” to recapitalisations with a common capital threshold applied to all lenders, a stance backed by Dr Merkel.

Markets had rallied after EU economics commissioner Olli Rehn said EU finance ministers shared the view that a concerted, co-ordinated approach was required. While Mr Rehn spoke of an increasing sense of urgency, his spokesman insisted yesterday that he was not referring to any concrete initiative.

Still, signs that a plan is in the works fanned a rebound in bank shares and a 3 per cent jump in European stocks generally. But the euro fell against the dollar, weighed down by lingering fear of a Greek default.

Mr Borges raised the possibility yesterday of the IMF or a special purpose vehicle it controlled buying Italian or Spanish bonds in co-ordination with the European Financial Stability bailout fund.

Hours later, however, he issued a statement saying no such initiatives were under way.

“Any alternative lending modalities to what we do now would require a different legal structure and the use of a different source of financing. We have not discussed these issues with our membership,” he said.