European Central Bank

IMF says Europe's banks may need to sell more assets

Fund sees disposals worth US$4.5 trillion if policymakers fail to solve crisis in region

PUBLISHED : Thursday, 11 October, 2012, 12:00am
UPDATED : Thursday, 11 October, 2012, 1:11pm

The International Monetary Fund said European banks may need to sell as much as US$4.5 trillion in assets to 2013 if policymakers fall short of pledges to stem the fiscal crisis, up 18 per cent from its April estimate.

Failure to implement fiscal tightening or set up a single supervisory system in the timing agreed could force 58 European Union banks from UniCredit to Deutsche Bank to shrink assets, the IMF wrote in its "Global Financial Stability Report" released yesterday. That would hurt credit and crimp growth by 4 percentage points next year in Greece, Cyprus, Ireland, Italy, Portugal and Spain.

"There is definitely a need for deleveraging in Europe," said Michael Seufert, an analyst at Norddeutsche Landesbank in Germany. "The danger is that this produced a downward spiral as the regulation gets stricter and stricter and the global economy cools, potentially meaning more write-downs for banks. States in the periphery are hit hardest."

The IMF does not need to lend money to Spain to help the country tackle its fiscal crisis, managing director Christine Lagarde indicated yesterday. The Washington-based fund earlier this week cut its global growth forecasts and warned of even slower expansion if European officials do not address threats to their economies.

While the European Central Bank's plan to buy bonds of debt-burdened countries has pushed down bond yields, officials are waiting for a bailout request from Spain before putting the programme into action.

ECB president Mario Draghi in July pledged to do "whatever it takes" to preserve the monetary union, which has been battered by a three-year debt crisis triggered by Greece's hidden budget shortfall. He said last month that the Frankfurt-based bank may buy the bonds of nations that submit to the conditions of a rescue loan to lower yields.

Since Draghi's pledge, the yield on Spain's 10-year bond has fallen from above 7.6 per cent to 5.8 per cent yesterday.

Prime Minister Mariano Rajoy, who was due to meet his French counterpart Francois Holland in Paris yesterday, has said he is still weighing up whether his country needs a bailout since the ECB's safety net has already offered investors some reassurance and lowered borrowing costs.

Still, governments may find it more difficult to plug their budget gaps as the euro-region economy shows signs of a deepening slump.

Euro-zone services and manufacturing industries contracted last month and economic confidence dropped. Unemployment held at 11.4 per cent in August, a record.

The fund is helping monitor a €100 billion (HK$1 trillion) bailout of Spanish banks and is co-financing rescue packages for Greece, Ireland and Portugal. While the ECB has said the IMF should be involved in overseeing the economic programmes of countries asking the central bank to buy their bonds, the fund's exact role has not been defined.

"Unless confidence in the euro area is restored, fragmentation forces are likely to intensify bank deleveraging, restrict lending, add to the economic woes of the periphery, and spill over to the core," the IMF said.

Meanwhile, Japanese Finance Minister Koriki Jojima said a decision by his Chinese counterpart and China's central bank chief not to attend the IMF meetings in Tokyo this week is "regrettable".

"We will take a wide view on communication with China," Jojima said after he was informed of the no-shows. He called Sino-Japan economic relations "very important".