Europe prepares to come clean on hidden bank losses

Sun Oct 13, 2013 6:05pm EDT
 
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By John O'Donnell and Robin Emmott

LUXEMBOURG (Reuters) - Euro zone countries will consider on Monday how to pay for the repair of their broken banks after health checks next year that are expected to uncover problems that have festered since the financial crisis.

Nobody knows the true scale of potential losses at Europe's banks, but the International Monetary Fund hinted at the enormity of the problem this month, saying that Spanish and Italian banks face 230 billion euros ($310 billion) of losses alone on credit to companies in the next two years.

Yet five years after the United States demanded its big banks take on new capital to reassure investors, Europe is still struggling to impose order on its financial system, having given emergency aid to five countries.

Finance ministers from the 17-nation currency area meeting in Luxembourg will tackle the issue of plugging holes expected to be revealed by the European Central Bank's health checks next year.

The president of the European Central Bank underscored the need for action in Washington at the meetings of the International Monetary Fund and the World Bank.

"The effectiveness of this exercise will depend on the availability of necessary arrangements for recapitalizing banks ... including through the provision of a public backstop," Mario Draghi said on Friday. "These arrangements must be in place before we conclude our assessment," he said.

But the ministers' talks face an additional hindrance because Germany's finance minister, Wolfgang Schaeuble, is not expected to attend the two-day Luxembourg meeting. Germany, Europe's biggest economy, in talks to form a new government.

During the region's debt turmoil, the European Union conducted two bank stress tests, considered flops for blunders such as giving a clean bill of health to Irish banks months before they pushed the country to the brink of bankruptcy.   Continued...

 
The European Central Bank (ECB) President Mario Draghi reacts during the monthly news conference in Frankfurt, February 9, 2012. REUTERS/Alex Domanski