The comments came amid reports of customers withdrawing savings from the French-Belgian financial institution Dexia, which is about to receive its second bailout in three years. Shares of the bank, which is weighed down by its exposure to Greek debt, plunged following an acknowledgment Sunday from Athens that Greece would miss financial targets.
The frightening speed of that chain reaction has prompted European regulators to review the results of the bank stress tests to test for a possible Greek default. Dexia passed the test last time around. European policy makers also face discussions on a broader effort to pump money into the banking sector to reassure jittery investors.
“Germany is prepared to move to recapitalization,” Mrs. Merkel said during a visit to Brussels, adding that the criteria for such a move would need to be established by experts and that other European countries should do the same with their banks. “We are under pressure of time,” she said. “I think we need to take decisions quickly.”
Her comments, allied with a call for recapitalization from the International Monetary Fund, increased pressure on countries at the center of the euro zone to strengthen their vulnerable banks — something that might put national finances under strain.
“There is a general consensus that this is urgent, and should be done in the next few weeks,” said Antonio Borges, the I.M.F.’s European department head, adding that Europe would need to prime its banks with as much as €200 billion, or $267 billion, in fresh capital. “We would recommend that it move to a European approach. More should be done on a cross-border basis,” he added.
Mr. Borges initially appeared to suggest that the I.M.F could invest “alongside” the euro zone’s new bailout fund, if and when that fund assumed powers to buy euro zone government bonds, but he later issued a statement saying that was not being contemplated.
The French finance minister, François Baroin, endorsed calls for an examination of whether Greece’s private creditors should face higher write-downs on their investment as part of Greece’s second bailout.
“Given what’s happened over the last three months, we should perhaps look at the extent of the private-sector involvement,” Mr. Baroin said on the French radio station RTL.
Mrs. Merkel also appeared to support that position, which was the subject of debate by euro zone finance ministers at a meeting Monday in Luxembourg.
But the immediate concern appears to be what to do with big European banks deemed to have dangerously-high exposure to Greek debt.
France’s caution over recapitalization illustrates how each potential solution to the euro zone crisis tends to raise fresh problems to the surface.
If the French government pours large financial resources into its banking sector, it risks losing its triple-A credit rating because the large-scale spending that may be required could worsen its public finances. A lower rating would be economically undesirable because it would increase French borrowing costs; politically, it would be damaging to the current government ahead of presidential elections next year.
“The problem is that if you recapitalize the banks then you have a problem with sovereign debt,” said one European official not authorized to speak publicly. “That is Paris’s big issue.”
The issue of bank recapitalization also raises a question of strategy: whether governments should concentrate on shoring up European banks or spend resources instead on resolving the crisis in Greece, whose debt and financial troubles prompted the latest wave of anxiety about the banking sector.
The French president, Nicolas Sarkozy, is scheduled to meet with Mrs. Merkel for talks on Sunday.
Article source: http://www.nytimes.com/2011/10/06/business/global/europe-girds-for-breakout-of-new-bank-brush-fires.html?partner=rss&emc=rss