European and world leaders must hurry to find a solution to the euro area sovereign debt crisis that is threatening to escalate into a crisis of global magnitude.
European banks need recapitalization of hundred billion euros to cope with losses arising from states’ debts. Rating agencies further complicate the problem by downgrading vulnerable states and European banks.
French President Nicolas Sarkozy and German Chancellor Angela Merkel met Sunday to discuss the issue of bank recapitalization and Greece, while the lack of confidence in the banking system, credit institutions vulnerable countries with debt problems in the euro area and increased nervousness are likely to affect world markets on the verge of the worst financial crisis in history.
The meeting took place while the rating agency Moody’s cut at the end of the week the ratings of 12 banks and financial companies in UK, including Royal Bank of Scotland, and six Portuguese credit institutions, including Banco Comercial Portuguez, according to The Wall Street Journal.
The agency said that the reason of its decision was that British government support for the banking system is uncertain, and smaller creditors could be left to bankruptcy if they face financial problems. In Portugal, the country’s economic and financial matters deprive banks from financing on the market, they rely on funds provided by the ECB.
Worsening the problems facing the banks determines more and more officials and institutions to expect the worst.
Bank of England Governor Mervyn King warned that the world is facing the most severe financial crisis in history or at least since 1930, writes The Telegraph.
He made these statements after the bank’s monetary policy committee decided to pump 75 billion pounds in economy in a desperate effort to avoid another credit crisis and a new recession in the United Kingdom.
IMF urged rapid recapitalization of European banks to stabilize markets and to prevent the economy from falling into a new recession. IMF Europe Director Antonio Borges estimated costs of such recapitalization to 100-200 billion euros.
Ireland has estimated that European banks may need additional funds of over 100 billion to survive the debt crisis, writes Reuters. Reducing the amount of sovereign debt portfolios of banks has already caused the implosion of the credit Belgian institution Dexia.
“There is a risk for this crisis to intensify and expand”, said German Finance Minister Wolfgang Schaeuble in an interview with Frankfurter Allgemeine Sonntagszeitung.
So far, Germany and France had different ideas about how banks could be strengthened and how to address the contamination in the financial markets from a possible entry of Greece into default. Paris wants the euro zone rescue fund FESF to be used to recapitalize French banks, arguing that they have the greatest exposure to the debts of countries with financial problems. But Berlin argues that the fund should be accessed only when an entity is unable to secure bank financing and the state can’t help.
Some European officials fear that forced recapitalization of some big banks would not be the best use of limited capital resources of Europe.
According to Frankfurter Allgemeine Zeitung, the five largest French banks could agree to take 10 to 15 billion euros from the state.