G-20 Seeks Broader Solution for Europe Debt Crisis

After offering piecemeal solutions for more than a year, the G-20 finance ministers are now seeking a broader plan to prevent the crisis from engulfing big countries like Spain, which saw its sovereign credit rating cut anew on Thursday, a move that may deepen the impact of the debt crisis on European banks.

The United States Treasury Secretary, Timothy Geithner, who is attending the meetings, has said a solution is needed to prevent Europe’s troubles from infecting the rest of the world.

Finance Minister Francois Baroin of France said after talks on Friday that officials had “already come to some agreements that will be very important,” but he did not provide specifics.

The weekend discussions are a precursor to a crucial summit meeting planned for Oct. 23 in Brussels by European leaders.

While they were not expected to produce all the solutions, officials want to strike a deal soon to increase the size of a Europe-wide bailout fund for troubled countries and banks, known as the European Financial Stability Facility. They also want to force Europe’s banks to raise more capital and require private investors to take larger-than-anticipated losses on their holdings of Greek government bonds to avoid running up the bill to taxpayers.

Financial markets seemed to believe that the Europeans were getting serious about a solution: stock markets have risen recently on hopes for a deal, especially after German Chancellor Angela Merkel and French President Nicolas Sarkozy pledged last weekend to deliver a plan. Major European stock indexes closed up for the week and Wall Street was higher in midday trading Friday.

But investors reading between the lines see further complications, especially for Europe’s banks. Banks charge that new capital requirements will force them to curb lending to consumers and businesses, hurting already weak economic growth. But some are already selling assets and various businesses to raise money to meet them.

On Friday, Standard Poor’s downgraded the credit rating of the biggest French bank, BNP Paribas, citing its “material” exposure to Italy, which faces similar problems to Greece, but on a much-larger scale.

In an assessment of five major French banks, including Société Générale and Crédit Agricole, S.P. said that all of their financial profiles had weakened as a result of more difficult economic and funding market conditions ahead. The agency also said that it believed the French government was ready to provide them with “extraordinary support” if needed.

Also Friday, the Fitch ratings agency said it would review various ratings for Deutsche Bank, BNP Paribas, Société Générale, Credit Suisse, and Barclays, citing “increased challenges the financial markets are facing” as a result of economic developments and regulatory changes.

That followed the announcement by Standard Poor’s that it was downgrading Spain’s sovereign rating again, to AA- from AA, amid signs that harsh austerity measures may tip the country into a recession. The decision is ill-timed for the many European banks that together hold about $637 billion worth of Spanish government debt.

The banking industry has been girding to battle with European policymakers and regulators in the coming days, especially over a plan that would force the banks to take losses on their holdings of Greek debt of up to 60 percent — much more than a 21 percent loss agreed to under an accord reached by European leaders in July as part of a second Greek bailout.

Several of the continent’s biggest banks, including BNP Paribas and Société Générale, have said they are ready to take losses of around to 50 percent. But most banks that hold Greek debt would have to sign off on a new deal, and an agreement is not certain.

Bankers are particularly angered by two additional proposals from the European Banking Authority, which has come under fire for overseeing flimsy tests on the safety margins of Europe’s banks.

One proposal would require lenders to raise their capital buffers to around 9 percent from 6 percent now, or be forced into the undesirable position of taking money from their governments. Another would require lenders to value all their sovereign debt holdings at current market prices, as part of a “stress test” to ensure that Europe’s banks have enough capital to insure against large-scale losses if the crisis were to spread to the big euro zone countries like Italy.

Article source: http://www.nytimes.com/2011/10/15/business/global/g20-seeks-broader-solution-for-europes-debt-crisis.html?partner=rss&emc=rss