IMF pledges support for Europe's banks

Olli Rehn, EU Commissioner for Economic and Monetary Affairs, speaks during a seminar in September in Washington.

Story highlights

  • IMF says rapid recapitalisation of its financial sector, is needed to staunch crisis
  • EU finance ministers are looking at co-ordinating recapitalisations of financial institutions according to Olli Rehn
  • The IMF's Europe director, warned that a failure to address a lack of confidence in the continent's banks could lead to a credit crunch
The International Monetary Fund has urged European governments to undertake a rapid recapitalisation of its financial sector, to staunch a crisis that is slowing economic growth.
The fund said it stood ready to join the eurozone's rescue fund in buying bonds from distressed governments to help restore market confidence in a sector that is heavily exposed to the debt of countries like Greece and Italy.
Olli Rehn, European commissioner for economic affairs, confirmed to the Financial Times earlier this week that European Union finance ministers are examining ways of co-ordinating recapitalisations of financial institutions to shore up the region's banks.
France and Belgium have already offered guarantees to Dexia, the Franco-Belgian lender, which has struggled to raise enough short-term cash to run its day-to-day operations.
Antonio Borges, the IMF's Europe director, on Wednesday warned that a failure to address a lack of confidence in the continent's banks could lead to a credit crunch at a time when the economy is already decelerating.
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"We have to restore confidence quickly. The best way to do that is to have a capital increase rather quickly," Mr Borges said.
"We're offering to be co-operative and to work alongside them [the EU]," he said, noting that the IMF would have to create a special purpose vehicle to achieve this.
However, any IMF move to buy eurozone sovereign debt is likely to raise concern from emerging market shareholders, who are already concerned the Fund is overextending itself on too generous terms to Greece.
The announcement came as the latest IMF forecasts, in its European economic outlook, revealed a sharp slowdown in economic activity across Europe since the second quarter of the year.
The IMF is now expecting 2.3 per cent growth this year -- down from 2.4 per cent last year -- and just 1.8 per cent in 2012.
The IMF attributed the slowdown in part to a growing nervousness on the part of investors, brought on by the uncertainty of the eurozone debt crisis.
"Many investors have become far more risk averse than they were before," Mr Borges said, adding that a recession was "something that cannot be ruled out."
The IMF is recommending a more relaxed monetary policy across western Europe. It may also encourage those governments with the means to spend more freely.
The move by individual banks to cut their lending was understandable, given their reduced access to funding, Mr Borges acknowledged. But the consequences of so many banks retrenching simultaneously was potentially dire for the broader economy.
Eurozone officials have been discussing a number of ways to recapitalise banks through a leveraged rescue fund. Before they can do so, they must wait for national government to ratify changes to the fund agreed in July in order to give it more firepower and flexibility.
Mr Borges was sanguine about ongoing negotiations with Greece over an €8bn loan payment the country has said it needs to pay its bills this month.
"There is no urgency," Mr Borges said, noting that the government did not have any foreign debt payments to make until December and could manage its cash for salaries and other domestic obligations through next month.