Bloomberg News

Europe Bank Plan Is Right Focus to End Crisis, Berglof Says

October 05, 2011

(Updates with comments on eastern bank units in final two paragraphs.)

Oct. 5 (Bloomberg) -- European Union plans to boost bank capital are the “right” approach to contain the euro region’s debt crisis, said Erik Berglof, chief economist at the European Bank for Reconstruction and Development.

“I feel confident that the focus is now on the right things,” Berglof said in an interview with Owen Thomas on Bloomberg Television’s “On the Move.” “They are trying to have a coordinated capitalization of the banks. I think this is the right way to go.”

EU officials are working on a plan to inject more “official” and “private” funds into the bloc’s lenders, Antonio Borges, the International Monetary Fund’s European department head, said today in Brussels. The recapitalization of Europe’s banks must continue, EU Economic and Monetary Affairs Commissioner Olli Rehn said yesterday.

The London-based lender, which fosters the transition to market economies in Europe’s former communist nations, led efforts following the 2008 collapse of Lehman Brothers Holdings Inc. to persuade western banks to roll over funding for their eastern units and inject fresh capital if needed, averting a region-wide banking crisis.

European banks may need more than 140 billion euros ($186 billion) of capital through a program similar to the U.S. Troubled Asset Relief Program, Morgan Stanley analysts said in a research note today.

Italy Downgraded

Europe’s debt crisis intensified as Moody’s Investors Service lowered Italy’s debt grade by three steps late yesterday, warning that euro-area nations rated below the top Aaa level may see their rankings cut.

Eastern Europe faces fallout from the debt crisis, with about three-quarters of the region’s banking industry owned by western lenders such as Unicredit SpA, Erste Group Bank AG and Societe Generale SA, Berglof said. The IMF warned today in a report that “the repercussions for emerging Europe would be dire,” with a new credit crunch most likely.

“In almost any scenario you can think of now there will be some impact on the subsidiaries of these banks,” Berglof said. The task is “figuring out which subsidiaries depend particularly on their parents or need new capital.”

Recapitalization plans within the euro region aimed at relieving the crisis must include the east European units of western lenders, Berglof said at an event in Brussels today.

“Support must be extended to the subsidiaries,” Berglof said, speaking at an event in Brussels today. “The deleveraging process is threatening what’s been achieved. We really need to be careful not to take measures in western Europe to jeopardize” banking presence and economic growth in the east.

--With assistance from Rebecca Christie in Brussels. Editors: Andrew Langley, Paul Abelsky

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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