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Europe struggles with bank support

German Chancellor Angela Merkel walks past with European Commission President Jose-Manuel Barroso at the European Commission headquarters in Brussels, Wednesday, Oct. 5, 2011. German Chancellor Angela Merkel walks past with European Commission President Jose-Manuel Barroso at the European Commission headquarters in Brussels, Wednesday, Oct. 5, 2011. (AP Photo/Yves Logghe)
By Gabriele Steinhauser
AP Business Writer / October 5, 2011

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BRUSSELS—European countries are wrangling over how to address rising market panic about the health of their banks, with some pushing for a concerted effort to recapitalize struggling lenders while others are reluctant to put up more taxpayer money.

The International Monetary Fund, which has been a key player in the eurozone's debt crisis, on Wednesday renewed a call on the continent's leaders to quickly steel banks against worsening market panic. The IMF has said as much as euro200 billion ($266.74 billion) may be needed to boost banks' capital buffers, although some of that money could come from private investors.

"We're not saying that banks are weak, we're not saying that banks are in trouble," said Antonio Borges, the head of the IMF's Europe program. "We're simply saying that no banking sector in the world can survive a general loss of confidence."

That call found some support from German Chancellor Angela Merkel, who said she would support a Europe-wide plan to recapitalize banks if such a move was deemed necessary.

Banks are required to hold a certain amount of low-risk assets that can absorb losses on their investments, but many analysts say that those cushions are way too small in light of the worsening eurozone crisis.

"If there is a common view that banks aren't sufficiently capitalized for the current market conditions" financial firewalls should be built, Merkel said in Brussels after a meeting with European Commission President Jose Manuel Barroso.

Merkel said "common guidelines" on the right amount of capitalization were necessary, adding that this was a matter of urgency and should be addressed at a summit of EU leaders later this month.

However, not everyone agrees. Finance ministers from the 27 European Union countries spent several hours discussing what to do about their banks at a get-together in Luxembourg Tuesday without reaching a conclusion.

After the meeting, German Finance Minister Wolfgang Schaeuble said that not all countries had been prepared to present their national backstops against banking crises, adding that the discussion needed to be revisited at their next meeting.

There was little question about the relevance of the debate. It happened just as France, Belgium and Luxembourg were struggling to keep Dexia bank from being the first major European lender to collapse since the end of the 2008 credit crunch.

But Europe has been slow to address a worsening crisis in its financial sector that is making banks reluctant to lend to each other and give loans to businesses, exacerbating an economic slowdown.

Three rounds of stress tests since the 2008 credit crunch have failed to restore confidence in the banking sector and Dexia was not even one of the nine banks that failed the most recent exercise in July, or among the 16 that barely passed.

While the European Commission, the EU's executive, disputes the euro200 billion estimate that the IMF says may be needed to recapitalize banks on the continent, it does acknowledge that something needs to be done to address fallout of the worsening eurozone debt crisis.

Most investors now expect Greece to default on its massive debts, dealing a blow to banks holding its bonds. A bigger problem would be if much larger Spain or Italy no longer repaid their debts.

"National efforts need to be put under a European framework ... since one cannot isolate problems that happen to one or another bank," Commission spokesman Amadeu Altafaj Tardio said.

Dealing with their struggling banks on their own would likely overwhelm several European states, which have already piled up massive debts. That is why some of them, together with the IMF, are advocating to use the eurozone's bailout fund to prop up banks that can't garner enough private investors.

Merkel on Wednesday dealt a blow to those hopes, saying that while the euro440 billion ($586.83 billion) European Financial Stability Facility could help governments that can't afford expensive bank recapitalizations, those financial lifelines would have to come via the governments and be attached to strict conditions.

The weak state of Europe's banks has severely restricted the currency union's options when it comes to dealing with its crisis, since debt troubles in one state can quickly spark banking troubles in other countries.

It has also led to recriminations. Some citizens of bailed-out countries are accusing richer nations of forcing them into accepting onerous rescue loans and painful austerity measures just to avoid dealing with their own banks, which lent irresponsibly to those governments in the years before the crisis.