Newspaper article International Herald Tribune

Calls Grow for E.U. Bank Solution

Newspaper article International Herald Tribune

Calls Grow for E.U. Bank Solution

Article excerpt

After failed efforts to restore confidence in their sickly banks, European governments face growing pressure to give the E.U. more authority to shore up shaky lenders.

After several failed efforts to restore confidence in their sickly banks, European governments face growing pressure to change course and give the European Union more power to shore up the region's shakier lenders.

Calls for a reassessment of current policy have been fueled by a new crisis in Spain, where the government may have to plow EUR 7 billion to EUR 10 billion, or $9 billion to $13 billion, into Bankia, among the country's largest banks by assets, just as the government confronts its second recession in three years and continuing pressure from hostile bond markets.

But the growing clamor for action has raised a familiar issue: Are national governments ready to surrender more power to the European Union or its agencies to salvage the euro?

Some important voices now say openly that they should. Last month, Christine Lagarde, the managing director of the International Monetary Fund and a former French finance minister, called for a policy change allowing the euro zone's bailout fund, the European Financial Stability Facility, to lend directly to struggling banks, rather than to national governments only.

"What we are advocating is that this be done without channeling through the sovereigns," Ms. Lagarde said. Such a step might allow Spanish banks to tap E.U. funds, sparing the government the need to accept aid, which might look to many observers like a bailout.

The vice president of the European Central Bank, Vitor Constancio, went further than Ms. Lagarde, arguing that the 17- nation euro zone needed its own bank supervisor and a fund to shore up -- or wind down -- troubled banks.

The debate is central to the future of the European economy. While the bond market has traditionally been the main source of funding for companies in the United States, businesses in Europe tend to rely on a patchwork of commercial lenders. The reluctance of weak banks to extend credit to corporations has helped to keep some European economies trapped in a downward spiral.

One of those economies is that of Spain, where, after an enormous construction boom and bust, banks have struggled under a mounting burden of bad debt. Financial institutions have accumulated EUR 323 billion in real estate assets, of which EUR 175 billion was labeled "problematic" by the Bank of Spain last year.

On Friday, the government is expected to engage in its fourth attempt in three years to restore confidence in the banking sector. One step is to rescue Bankia, the country's largest real estate lender, which has EUR 32 billion in troubled assets.

The government is expected to go much further and order Spanish banks to set aside billions of euros more in provisions for bad loans, on top of the EUR 50 billion that the economy minister, Luis de Guindos, demanded in February. So far, the banks have set aside provisions for only about a third of the troubled assets they are holding.

The government is also likely to outline a plan to allow banks to transfer their most toxic assets to government-guaranteed asset management companies, mirroring the steps Ireland took in late 2009. …

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