Eurozone should tap fund to bolster banks: IMF

WASHINGTON: The IMF urged the eurozone Wednesday to try to halt contagion in the eurozone from the public debt crisis by tapping an emergency fund to bolster its weakest banks.

In its semiannual Global Financial Stability Report, the International Monetary Fund suggested that authorities could expand the use of the European Financial Stability Facility to directly aid the banks.

"Some European banks urgently need to bolster their capital levels," the IMF said.

"In current market conditions, however, this may not always be possible, so public backstops, first at the national level and ultimately through the European Financial Stability Facility should be used to provide capital to banks as needed," the IMF said.

Launched in May 2010, the EFSF was intended to help eurozone economies in trouble.

In July, eurozone leaders agreed to authorize the facility to buy their sovereign debt on the markets.

The plan requires parliamentary ratification by the zone's 17 member nations; to date, only the parliaments of France, Belgium, Italy and Luxembourg have approved.

The Washington-based institution estimated the eurozone debt crisis has directly cost banks in the European Union 200 billion euros ($237.7 billion) since end-2009, when Greece's public debt crisis erupted.

"This estimate does not measure the capital needs of banks, which would require a full assessment of bank balance sheets and income positions. Rather, it seeks to approximate the increase in sovereign credit risk experienced by banks over the past two years," the global lender said.

Of the 200-billion-euro total, 60 billion euros comes from the sovereign debt in Greece, 20 billion euros from Ireland and Portugal, and 120 billion euros from Belgium, Spain and Italy.

The IMF estimated another 100 billion euros in additional costs were linked to the banks of those six countries.

Considering the magnitude of these risks, and considering that "markets are likely to remain volatile," the IMF warned that accessing capital on the markets may prove impossible.

The IMF devoted a large section in the report to highly indebted Italy, the third-largest economy in the euro area that has sparked concerns it may be swept up in the debt crisis engulfing Greece, Ireland and Portugal.

"Given the systemic size of the bond markets in Italy and the sovereign funding needs there, these risks have become key drivers of market conditions, increasing the potential for spillovers across different asset markets," the IMF said.

Italy's debt "remains highly sensitive to a rise in funding costs."

Copyright AFP (Agence France-Presse), 2011