(See EXT4 for more on the euro-area financial crisis and GMEET <GO> for more on the G-20 meeting.)
Oct. 16 (Bloomberg) -- European Union Economic and Monetary Affairs Commissioner Olli Rehn said member states are set to agree on a “very serious plan” to recapitalize the region’s lenders and help contain its fiscal crisis.
“I expect that in the coming days, we’ll have more clarity on this,” Rehn told Bloomberg Television after a meeting of finance ministers and central bank governors from the Group of 20 nations in Paris yesterday. “Member states and banks need to have very clear plans to put recapitalization in place as swiftly as possible.”
With a summit looming on Oct. 23, European leaders are groping toward a master plan for dealing with Greece’s oversized debt, insulating the Spanish and Italian markets, and shielding banks from the fallout. German Chancellor Angela Merkel and French President Nicolas Sarkozy put bank recapitalization at the top of the priority list in an Oct. 9 declaration in Berlin that triggered a flurry of consultations in European capitals.
There’s now a “strong sense of urgency” among leaders, Rehn said. “The EU is acting very hard in order to put together a comprehensive strategy to overcome the sovereign debt crisis and banking-sector fragilities, which are severely intertwined.”
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, a person with knowledge of discussions at the authority, the EU’s top banking regulator said last week. Rehn said he “wouldn’t want to confirm any figures at this stage.”
There’s a “crisis consciousness which is now facilitating even difficult decisions, especially in order to reinforce the firewalls and contain contagion in Europe as well as pursue a very serious plan of recapitalization,” he said.
Officials are also working out ways to scale up the European Financial Stability Facility’s firepower without requiring another round of parliamentary approvals or dipping into the balance sheet of the European Central Bank. The strengthened fund will gain the power to buy bonds in the primary and secondary markets, offer IMF-style precautionary credit lines and enable the bolstering of bank capital.
Credit-default swaps on Greece signal a more than 90 percent chance the government will renege on its obligations within five years, assuming investors would recover 32 percent of their holdings in the event, according to CMA, which is owned by CME Group Inc. and compiles prices from dealers in the privately negotiated market. The swaps market is anticipating a 63 percent probability Portugal will default in that time, a 48 percent chance for Ireland and about 8 percent for Germany.
“There have been changes in market circumstances including swap rates since July and also some other changes in terms of agreement,” Rehn said. “We’re working on the basis on the July agreement, we don’t want to reopen it but revisit it. We’re looking forward to a new second program for Greece with adequate financing from the public sector and the private sector.”
--Editors: Craig Stirling, Simon Kennedy
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