Wednesday June 20, 2012
EU’s Barroso hints at direct support for European banks
LOS CABOS, Mexico: The president of the European Commission suggested on Monday that a way needed to be found to provide direct support to Europe's banks rather than lending to governments so they can recapitalise distressed lenders.
Speaking ahead of a summit of the Group of 20 industrialised and developing countries, Jose Manuel Barroso (pic) said the link between highly indebted governments and bad banks needed to be broken, and suggested Spain could be a starting point, although it remains legally difficult to do it immediately.
The eurozone agreed on June 9 to provide up to 100 billion euros (US$125bil) to Madrid to recapitalise its banks, with the aid going to the government's bank rescue fund.
That means the loans will accrue to Spain's sovereign debt, worsening its debt-to-gross domestic product ratio and increasing its financing costs.
“What we expect now is that Spain will make the formal request, and then we will discuss between the euro-area members the best way to do it,” Barroso told reporters.
He didn't know exactly what mechanism would be agreed to support Spain's lenders, weighed down by a wealth of bad property loans, but said that the Commission favoured a way that avoided saddling the government with more debt.
“Certainly the European Commission... will be in favour of a system that avoids as far as possible any kind of contamination between debt financial debt and sovereign debt because we believe that this is one of the issues that can have a negative impact in terms of market reaction.”
Germany is firmly opposed to direct recapitalisation from the eurozone's rescue funds because it ultimately leaves member states on the hook for banks. The rescue funds, both the temporary EFSF and the permanent ESM, which launches in July, were set up as country-to-country lending mechanisms. Reuters