Bloomberg News

Merkel Meets Lagarde as Banks Gains on Aid Speculation

October 06, 2011

(Corrects misspelling of Lagarde in second paragraph. See EXT4 for more on the European debt crisis.)

Oct. 6 (Bloomberg) -- German Chancellor Angela Merkel is hosting the heads of the International Monetary Fund and World Bank today as European banks shares gained for a second day as officials discuss a coordinated capital injection.

Merkel is due to hold talks from 3 p.m. in Berlin with IMF chief Christine Lagarde, World Bank president Robert Zoellick and Angel Gurria of the Organization for Economic Cooperation and Development among others. European Central Bank President Jean-Claude Trichet is due to meet Merkel after chairing his last rate-setting meeting.

The European Commission is “proposing to have a coordinated action to recapitalize banks,” commission President Jose Barroso said today in a video question-and-answer session.

Financial shares continued their advance after Merkel fed speculation that euro-area policy makers are working on plans to boost bank capital amid the sovereign-debt crisis. During a visit to Brussels, the chancellor made her most explicit comments on banks’ role in fighting the crisis since the spillover from Greece began to threaten France and Italy.

Today, France’s Le Figaro reported that French government is working on a contingency plan to take stakes in the country’s lenders. A government official rejected the report as false, without further explanation.

Merkel said that Europe’s rescue fund will only be used as a last resort to save banks and that investors may have to take deeper losses as part of a Greek rescue.

“Time is running out” to establish if recapitalization is necessary, Merkel told reporters yesterday. Troubled banks need to first seek capital on their own and national governments will help if that’s not possible, she said.

‘Certain Conditionality’

“If a country cannot do it using its own resources and the stability of the euro as a whole is put at risk because the country has difficulties, then there’s the possibility of using the EFSF,” the European Financial Stability Facility, she said. Using the rescue fund is “always tied to a certain conditionality.”

Signals that European politicians may step up efforts to aid banks and push investors to accept bigger 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 followed its three-level downgrade of Italy on Oct. 4 by warning that euro-area nations rated below the top Aaa level may see their rankings cut.

‘An Adjustment’

Merkel said that “if needed, there will be an adjustment” in investors’ share of a 159 billion-euro ($212 billion) second aid package for Greece, pending a report by international auditors on Greece’s finances due before a meeting of European finance ministers next month.

She said that she supports recapitalizing European banks “if there is a joint assessment that the banks aren’t adequately capitalized” and finance officials develop “uniform criteria.” Germany is ready to discuss possible bank aid at this month’s EU summit, she said.

France’s Natixis and BNP Parisbas SA were among the biggest gainers on the 46-member Bloomberg Europe Banks and Financial Services Index, which added 2.5 percent after yesterday’s 4.8 percent advance. Natixis climbed as much as 10.2 percent, while Paribas was up as much as 7.2 percent.

European banks may need more than 140 billion euros of capital through a program similar to the U.S. Troubled Asset Relief Program, Morgan Stanley analysts say.

‘Solvency Buffer’

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

EU officials are working on plans to boost bank capital to contain the debt crisis, the International Monetary Fund said.

“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 yesterday in Brussels. “We would recommend that it move to a European approach,” he said. “More should be done on a cross-border basis.”

--With assistance from Tony Czuczka in Berlin. Editors: James Hertling, Edward Evans

To contact the reporter on this story: Alan Crawford in Berlin at acrawford6@bloomberg.net

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


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