European officials under pressure to finalize rescue funds before bank stress test results

EU under pressure to finalize rescue fund

BRUSSELS — European officials are under pressure to finish setting up their bailout fund for indebted governments before next week’s publication of bank stress test results, which could highlight new financial strains.

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 should shed light on any vulnerabilities and 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.

However, the tests could also force banks to demand extra funds from cash-strapped governments, possibly forcing one or more of them to seek financial help.

That full financial backstop isn’t yet available because one EU member, Slovakia, is holding up the fund that aims to prevent any EU state from defaulting on debt. Its new government wants to negotiate further on how much it will pay into the fund.

Jean-Claude Juncker, head of the eurozone finance ministers’ group, told reporters Monday he is confident Slovakia will sign up soon and that the fund would be “available without any doubt by the end of the month.”

Slovakia’s new prime minister, Iveta Radicova, was due to hold talks with EU President Herman Van Rompuy later Monday and with the EU’s executive commission on Tuesday. Finance Minister Ivan Miklos said his country would “decide soon, as soon as possible.”

Officials say the fund should be ready before July 23, when banking supervisors publish stress tests to show how much 91 banks — or 65 percent of the region’s banking sector — would lose if the economy worsens sharply, financial market conditions deteriorate and borrowing costs soar.

The tests will show up which banks are most vulnerable to a worsening economic climate. This could force some of them to seek extra funding to counter potential losses. They can demand that from shareholders or from markets — or they may have to turn to governments.

It is possible that governments already carrying heavy debt could then seek financing from the bailout fund. EU officials, however, say that this is unlikely, even for Spain where savings banks are under strain from the collapse of a housing bubble and slow growth.

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.

German Finance Minister Wolfgang Schaeuble told DAPD news agency that he would urge German banks to publish the test results.

“In Germany, every bank must agree to that, but they will do it,” he told reporters before talks between eurozone finance ministers, describing it as “an important step to eliminate the current uncertainty in the markets.”

Cyprus’ Finance Minister Charilaos Stavrakis said he expected “generally positive” results from the tests. He said the worst case scenario for the banks would combine “bonds falling in value, plus a huge increase in nonperforming loans, plus a deterioration in the macroeconomic scenario of the main markets in which they operate.”

Separately, 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.