Germany urged Europe yesterday to recapitalise its banks where necessary to prevent the eurozone debt crisis from spreading as the IMF warned the EU to get its act together and head off recession.
As Greek police tear-gassed protesters in the latest strike over ever-deeper austerity measures, Chancellor Angela Merkel said a new round of bank bailouts were “justified, if we have a joint approach.”
She was speaking in Brussels during a visit to EU headquarters, after France and Belgium agreed to provide aid to Dexia, the first European bank to be dragged down by the eurozone debt crisis.
A credit crunch stemming from exposure to increasingly risky sovereign debt has deprived the banking sector of crucial funding and European Union partners are trying to coordinate governments’ actions to erect a financial firewall.
As the problems stemming from Greece’s debt burden morph into a crisis threatening global economic growth, Ms Merkel said there was no “magic wand” at Europe’s disposal to resolve the problems.
IMF Europe director Antonio Borges said that “somewhere between €100-200 billion will be more than enough” to back up the banks, adding it was “not that much money... by no means beyond reach.”
Mr Borges was in Brussels issuing the International Monetary Fund’s latest report on European economic prospects.
Neither he nor his report minced their words after two days of hectic talks in Luxembourg that kept Greece waiting to see if promised bailout funds, on hold for the past month, will come through and save it from default.
The IMF urged Europe to balance growth with austerity as it called for a “more than overdue” solution to the crisis, warning of recession next year if it fails to find the right recipe.
A durable solution would require “some difficult decisions” to improve crisis management and convince sceptical markets that Europe can speak as one on economic and monetary affairs, the IMF said.
Italy’s ratings downgraded
Italy brushed off yesterday a stinging ratings downgrade from Moody’s over gloomy growth and debt financing prospects, with investors joining a markets rally on signals of an EU-wide bank rescue plan.
Milan’s FTSE Mib index jumped 1.84 per cent at the open, despite the larger-than-expected Moody’downgrade from Aa2 to A2 which came after markets closed on Tuesday. The gain shrank to 1.14 per cent in late morning trade.
Moody’s said the downgrade “reflects ongoing economic and financial risks in Italy and in the euro area”.
It warned it may cut Italy’s rating further given that uncertain market environment and risk of further deterioration in investor sentiment could constrain the country’s access to public debt markets.
“If such risks were to materialise and the long-term availability of external sources of liquidity support were to remain uncertain, the country’s rating could transition to substantially lower rating levels,” Moody’s said.