EU executive calls on governments to ready financial help for vulnerable banks

EU calls on nations to ready bank rescues

BRUSSELS — The European Union’s economy chief called Monday for EU governments to prepare financial help for vulnerable banks that could run into trouble if the economy worsens as a crucial way of halting market worries about Europe’s debt crisis.

Markets are worried about how Europe’s financial system would fare if the economy stagnates or slides back into recession — or if a European state defaults on its debt and banks are forced to post losses on the large amounts of government debt they hold.

The stress tests on Europe’s 91 major banks would show how much they would lose if the economy worsens sharply, financial market conditions deteriorate and borrowing costs soar.

They could force any troubled banks to shore up their finances — potentially reassuring investors not convinced that EU nations’ massive “shock and awe” euro750 billion ($948 billion) rescue package would halt a debt crisis.

The tests to be published July 23 are “of paramount importance for restoring confidence in the European economy,” EU Economy Commissioner Olli Rehn told reporters. German Finance Minister Wolfgang Schaeuble also called them “an important step to eliminate the current uncertainty in the markets.”

Rehn warned that “when we publish the stress tests we will have to prepare for any possible pockets of vulnerability,” calling for governments to ready national “backstops” — either national bailout funds or state money — to recapitalize banks.

The EU’s new euro440 billion bailout fund — known as the European Financial Stability Fund — also stands as a last resort backstop for any of the 16 eurozone governments that can’t pay their debts.

It isn’t yet available because one member of the currency union, Slovakia, is holding up the fund, as its new government wants to negotiate further on how much the country will contribute.

Jean-Claude Juncker, head of the eurozone finance ministers’ group, told reporters Monday that the other 15 members “made it clear in today’s discussion that our expectation was that the Slovak government will sign” and abide by the previous government’s pledge.

Juncker and the head of the EU’s executive commission will hold talks Tuesday with Slovakia’s new prime minister, Iveta Radicova.

Slovakia’s failure to sign wouldn’t prevent the financial stability fund from raising money from markets to fund any eurozone bailout if needed, according to the fund’s chief, Klaus Regling.

“The EFSF could begin financial operations if necessary, if required, almost immediately,” he said.

He said the EFSF would not raise any funds before a formal bailout request was made, saying it did not want to raise money that was not needed. This also removes the threat that the fund could steal investors away from riskier European borrowers.

Juncker said the fund should be up and running by the end of the month — which could be after banking supervisors publish the stress tests.

According to a report from PricewaterhouseCoopers, German banks jointly have more nonperforming loans than lenders elsewhere in Europe, with some euro212.6 billion at the end of 2009. British banks had euro155.1 billion in nonperforming loans, with Spain’s smaller banking sector carrying some euro96.8 billion.

Juncker said eurozone ministers reviewed problems with Spain’s slipping competitiveness against other members of the currency zone and gave it “concrete guidance” on improving wage policies, labor market reforms and product market competition.

He gave no details, beyond praising the government’s “very demanding, very ambitious” efforts to make reforms to reduce a huge budget gap.

Separately, EU President Herman Van Rompuy said there was “a large consensus” among EU finance ministers at talks Monday for monitoring economic problems regularly and issuing recommendations to countries that are becoming less competitive than their neighbors. He gave no details on what would be watched or how any warnings would be enforced.

Ministers also discussed tougher sanctions for countries that break EU debt and deficit rules, but made no decisions. Van Rompuy plans to draw up longer-term reforms to strengthen EU rules for EU leaders to decide on in October.