Bloomberg News

EU Seeks Higher Bank Capital, Greek Payout in Crisis Fight

October 12, 2011

(Updates with Rehn quote in 11th paragraph. See EXT4 for more on the euro-area financial crisis.)

Oct. 12 (Bloomberg) -- European Commission President Jose Barroso called for a reinforcement of crisis-hit banks, the payout of a sixth loan to Greece and a faster start for a permanent rescue fund to master Europe’s debt woes.

Barroso urged a “coordinated approach” to deliver a “significantly higher capital ratio of highest quality capital” for banks, while offering government funds only as a last resort. Banks that require aid would be barred from paying dividends or bonuses.

“Reactive and piecemeal responses to different aspects of the crisis are no longer sufficient,” Barroso told the European Parliament in Brussels today. “We now need to get ahead of the curve.”

An Oct. 23 summit of euro leaders looms as a deadline for a breakthrough in combating the crisis, which has driven Greece toward default, rattled world markets and dented confidence in the survival of the 17-nation currency.

Stocks and the euro rose today as optimism flickered that the next anti-crisis plan will do what 256 billion euros ($353 billion) in aid pledges and 163 billion euros in European Central Bank bond purchases have failed to do so far.

European bank stocks advanced for a sixth day, buoyed by expectations that European governments would make money available to bolster balance sheets so banks can withstand a potential Greek bankruptcy. The Bloomberg European bank index rose 2.9 percent.

Seek Market Finance

Backing a division of labor demanded by Germany, Barroso said “systemic” banks should first seek market finance, tap their own governments if that fails and only draw on the European rescue fund as the ultimate backstop.

Banks may be required to maintain a 9 percent capital buffer to absorb sovereign risks, up from the 5 percent core capital level used in July’s stress tests, according to a person familiar with discussions at the European Union’s top banking regulator.

The specter of a possible Greek default shadows the pre- summit consultations. A debt restructuring “can’t be ruled out,” Jens Weidmann, head of Germany’s central bank, told Bild in an interview published today.

To make Greece’s debt burden manageable, European leaders are debating whether to push bondholders to accept losses that go beyond the roughly 21 percent agreed on in July.

Sustainable Solution

Barroso and the commission’s economics chief, Olli Rehn, tiptoed around that question in today’s parliament debate. Bondholders must make an “adequate” contribution to “a sustainable solution for Greece,” Rehn said.

Greek state workers barricaded the Finance Ministry in downtown Athens today, museum attendants stayed home, prison guards went on strike and dockworkers staged a four-hour stoppage to protest budget cuts needed to unlock international loans.

The unrest will continue in the lead-up to a parliamentary vote next week on Prime Minister George Papandreou’s plans to cut wages and pensions and fire 30,000 government employees.

Greece won breathing space yesterday when commission, ECB and International Monetary Fund inspectors recommended releasing a loan installment of 8 billion euros next month.

The “positive” report will clear the way for the payout, Luxembourg Prime Minister Jean-Claude Juncker, who heads the panel of euro finance chiefs, told RTL radio today. “With that the Greek problem isn’t yet solved, but this is an important step.”

Barroso sought to put the commission, the EU’s executive arm, at the center of rescue operations marked so far by discord between Germany, France, smaller euro-zone governments and the independent central bank.

Slovakia Struggles

The latest country to make the crisis response hostage to domestic politics was Slovakia, which failed to ratify a planned reinforcement of the rescue fund late yesterday in a vote that toppled the government.

Politicians in Slovakia, which switched to the euro in 2009 and sat out Greece’s first 110 billion-euro aid package last year, agreed today to hold a second vote on Oct. 14. Parties representing a majority pledged to vote yes.

“Political uncertainties, such as this one, will contribute to the euro-area crisis persisting at varying degrees of intensity for an extended period,” Fitch Ratings said in a statement in London today.

Rescue Fund

Barroso said Europe needs to get more out of the 440 billion-euro rescue fund, set to obtain additional powers once Slovakia completes the 17-country ratification marathon.

Known as the European Financial Stability Facility, the fund will be enabled to buy bonds in the primary and secondary markets, offer precautionary credit lines and enable the bolstering of bank capital.

Officials are working out how to scale up the financial clout without requiring another round of parliamentary approvals or tapping the ECB’s balance sheet. The central bank has ruled out granting the EFSF a banking license.

“The EFSF must be more than just a firewall,” Barroso said. “It should have real firepower. We should maximize its capacity.”

Barroso repeated a call for governments to set up the permanent fund, the 500 billion-euro European Stability Mechanism, by mid-2012, a year earlier than planned.

The commission’s proposals for strengthening euro-area economic management centered around giving more power to the central EU authorities to intervene in national budget setting.

Barroso also said he will release an options paper on the sale of joint euro-area bonds -- now rebaptized “stability bonds” by the end of the year. Top-rated countries such as Germany have ruled out common borrowing.

--With assistance from Jonathan Stearns in Brussels, Svenja O’Donnell and Ben Moshinsky in London, Stephanie Bodoni in Luxembourg, and Jana Randow and Aaron Kirchfeld in Frankfurt. Editors: James Hertling, Leon Mangasarian.

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net

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


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