Bloomberg News

IMF Sees Europe Working on Bank Plan as Moody’s Warns of Cuts

October 05, 2011

(See EXT4 for more on the European debt crisis.)

Oct. 5 (Bloomberg) -- European Union officials are working on plans to boost bank capital to contain the euro-region’s debt crisis, the International Monetary Fund said, as Moody’s Investors Service warned of deteriorating public finances.

“There is no secret at all that European authorities and the European Commission are all working together on a plan to bring more official capital, more public-sector capital, into the banking sector,” Antonio Borges, the IMF’s European department head, said today in Brussels. “We would recommend that it move to a European approach,” he said. “More should be done on a cross-border basis.”

European bank stocks climbed, with France’s Credit Agricole SA and Dexia leading the 46-member Bloomberg Europe Banks and Financial Services Index 2.6 percent higher. Credit Agricole climbed 9.4 percent to 5.14 euros of 12:50 p.m. in Paris trading, while Dexia was up 7.2 percent to 1.08 euros.

Signals that European politicians may step up efforts to aid banks and push investors to take deeper losses as part of a Greek bailout reflect international pressure to end the debt crisis and domestic opposition to expanding rescues.

Moody’s Investors Service late yesterday followed its three-level downgrade of Italy by warning that euro-area nations rated below the top Aaa level may see their rankings cut.

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 say.

“Policy makers increasingly want to build a large solvency buffer,” the analysts led by Huw van Steenis said in a note today. “We think banks in core Europe need to be recession proofed and banks in the periphery depression proofed.”

Dexia Plans

At the same time, officials in France and Belgium are preparing a bailout for Dexia SA. Dexia will pool its troubled assets into a “bad bank” with Belgian and French government guarantees to protect depositors and its municipal-lending business after struggling to fund itself.

The lender may hive off its French municipal loan book into a venture funded by state-owned La Banque Postale and Caisse des Depots et Consignations, and seek buyers for its Belgian bank, Denizbank AS in Turkey and its asset-management division, according to a person with knowledge of the talks.

EU spokesmen moved to damp speculation triggered by a Financial Times report late yesterday on progress toward a bank- recapitalization plan.

EU Economic and Monetary Commissioner Olli Rehn “doesn’t speak of a concrete plan in hand,” his spokesman, Amadeu Altafaj, said today in Brussels. “He speaks of an initiative, of discussions in progress and he pleads for a European approach.”

No New Plan

The commissioner “clearly indicated he doesn’t have a new recapitalization plan,” the commission’s chief spokeswoman, Pia Ahrenkilde Hansen, said.

The speculation about efforts to support banks followed a finance ministers’ meeting in Luxembourg in which officials signalled their intent to prod investors to cover more of the cost of bailing out Greece.

“Many euro countries have now realized that the July deal is too advantageous for investors and there’s too little investor burden sharing,” Finland’s Finance Minister Jutta Urpilainen said today in Helsinki. “This was discussed at Monday’s euro group; how can we find a way to increase burden sharing? No solution’s been put forward so far.”

Greek Swap

Banks are negotiating a bond swap with Greece that would cut the nation’s debt load at a cost to investors estimated at about 21 percent. They pushed back at suggesting deeper losses.

It would be “counterproductive” to reopen the Greek deal now that investors have signaled support and the euro area’s 17 parliaments are close to ratifying the agreements, Charles Dallara, managing director of the Institute of International Finance said, said in a telephone interview yesterday. IIF represents more than 450 banks and took part in the July 21 negotiations that led to a second rescue package for Greece.

When the bailout was announced, banks and other bondholders were expected to contribute about 50 billion euros alongside 109 billion euros in public funds and a proposed 20 billion-euro debt buyback. German Finance Minister Wolfgang Schaeuble told reporters in Luxembourg yesterday that the deal may require “adjustments” depending on whether Greece has met its commitments and other developments.

Greek 10-year bonds trade for about 39 cents on the euro and two-year notes for about 43 cents, according to data compiled by Bloomberg.

--With assistance from Kati Pohjanpalo in Helsinki and Elena Logutenkova in Zurich. Editors: James Hertling, Edward Evans

To contact the reporter on this story: Rebecca Christie in Brussels at Rchristie4@bloomberg.net; Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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