EU Leaders Strike Deal for Bank Recapitalization by June 2012

Finance | October 27, 2011, Thursday // 00:12|  views

German Chancellor Angela Merkel and UK PM David Cameron at the EU Council Summit in Brussels Wednesday night. Photo by EPA/BGNES

The leaders of the 27 EU member states have agreed to force banks to raise more capital by June 2012 as a countermeasure against potential losses from a restructuring of Greece's debts and the wider financial crisis in Europe.

The heads of state and government of all EU member states meeting on 26 October expressed their "common resolve to do their utmost to overcome the crisis and to help face in a spirit of solidarity the challenges confronting the European Union and the Euro area," the EU Council Presidency press service reported.

The leaders agreed a text  "Consensus on banking package", subject to agreement on these measures and other elements by the same evening's Euro Summit.

"The consensus concerns both the banks' short-term and longer-term needs," Herman Van Rompuy, President of the European Council, stated at the close of the summit. "The overarching goal of the exercise is to foster confidence in the European banking sector." These measures will be finalized by the Economic and Financial Affairs Council, the European Council Presidency said.

European banks will need to raise their capital buffers to 9% in core Tier 1 capital, a measure of banks' financial health, Polish Prime Minister Donald Tusk told a news conference, as cited by international news agencies.

The bank recapitalization deal is supposed to be part of a wider package including also a reduction of Greek sovereign debt, and expansion of the bailout fund of the euro zone.

"The banks that participated in the stress tests will create an additional capital buffer that... should not be lower than 9%. This buffer should be reached by June of next year," said Tusk, whose country holds the rotating EU presidency until the end of this year.

He was referring to EU bank stress tests earlier this year, in which the European Banking Authority measured the financial wellbeing of some 90 banks.

The Polish PM did not specify how much banks would need to raise, but reports put the figure at EUR 106.5 B, or at least in the EUR 100-110 B range.

Proposals to increase the EUR 440 B bailout fund, the so called European Financial Stability Facility, "several fold" or closer to EUR 1 T according to a draft statement, were put on hold at the summit.

The statement from the EU leaders' meeting said national supervisory authorities must ensure banks do not "excessively" shrink their loan books to meet tougher capital rules, so as not to freeze lending and push an already weak European economy into a deep recession.

Polish Finance Minister Jacek Rostowski is quoted by international media as saying the new plan will only work if euro zone leaders agreed on a reduction in Greek debt and to increase the euro zone's EFSF bailout fund to convince investors that Spain and Italy had the backing they need to refinance their debts.

"Bank recapitalization without the remaining elements, such as the so-called firewall... wouldn't have any chance of success," he told the news conference.

The man leading the Greek "haircut" talks on behalf of the banks and insurance companies, Charles Dellara of the Institute for International Finance (IIF), said there was "no agreement on any element of a deal," raising the threat of a default by Greece. The banks have offered to accept writedowns of 40% but the EU, led by German chancellor Angela Merkel, insists on at least 50% – and perhaps up to 60%, The Guardian reported.

Dellara and bankers later went into emergency talks with Merkel, French president Nicolas Sarkozy, and IMF managing director Christine Lagarde in the private office of European Council president Herman Van Rompuy.

Merkel and Sarkozy, EU sources said, were commuting back and forth between the full summit and the office where they were holding the talks with bankers, in a desperate attempt to save the summit.

Europe's financial markets were closed by the time the first of a number of official statements emerged from the talks, but on Wall Street the immediate response was one of relief, with the Dow Jones closing up 162 points, or 1.4%.

Last night the pan-European regulator the European Banking Authority (EBA) revealed that around 70 bigger banks across Europe would face not only raising extra capital, but extra steps to restart the "term unsecured funding market".

Italy, seen as the biggest threat to the eurozone stability, faces intense pressure to produce a credible plan to reduce its debt, which is 120% of national output.

Jean-Claude Juncker, president of the Eurogroup, said: "Our Italian friends know well that we have to assume that we will be informed this evening that there will be significant, structural [budget] consolidation efforts from Italy. That is a must".

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Tags: EU, Angela Merkel, Nicolas Sarkozy, Germany, greece, Greek debt, debt crisis, debt crises, debt writedown, Charles Dallara, IIF, banks, banking sector, EFSF, European Financial Stability Facility, bailout, bailout fund, euro zone, Eurogroup, European Council, Herman van Rompuy, EU President, recapitalization, Italy, Spain


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