Wednesday, 5 October 2011
Oct 5 (Reuters) - Banks in France, Italy and across Europe are under renewed scrutiny for signs they will follow Dexia and need state help as policymakers talk up the need to raise capital to halt a euro zone crisis.
The bailout of Belgian-French bank Dexia has intensified pressure to improve bank solvency, in a bid to break a vicious circle of negative news from indebted governments and troubled banks feeding on each other.
"Solving the sovereign crisis today is unrealistic because we are in the midst of a political crisis. So an interim solution is to make the banks safe and put precautionary capital into the banking system, to recognise people's concern and say 'Here is capital to reassure the bond market'," said Mike Harrison, bank analyst at Barclays Capital.
After months of inaction, the EU has begun working on a scheme to shore up lenders. With banks shut out of funding markets and seeing costs to insure their debt rising, calls for action have built.
European commissioner for economic affairs Olli Rehn said banks' capital positions "must be reinforced", and German Chancellor Angela Merkel said on Wednesday that she was willing to act quickly to recapitalise the sector.
That has left investors fretting over potential weaklings.
Merkel Signals More Greek Investor Losses
German Chancellor Angela Merkel said that Europe’s rescue fund will only be used as a last resort to save banks and that investors may have to take deeper losses as part of a Greek rescue.
Merkel’s comments, her most explicit on banks’ role in fighting the debt crisis since the spillover from Greece began to threaten France and Italy, followed talks with European Commission President Jose Barroso in Brussels today. Financial shares rose amid speculation that euro-area policy makers are working on plans to boost bank capital to contain the crisis.
“Time is running out” to establish if recapitalization is necessary, Merkel told reporters. Troubled banks need to first seek capital on their own and national governments will help if that’s not possible, she said.
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