WASHINGTON: International Monetary Fund head Christine Lagarde said Tuesday thatEurope needs a dedicated institution that could help to recapitalize the teetering banks of the region.
She said that the disparate regulatory regimes of euro area countries led to a "vicious cycle" of banks damaging government finances, and banks also being damaged by fiscally troubled governments.
"In the eurozone, a single financial market cannot rely on legal and institutional frameworks that operate on an asymmetric national basis," she said in a speech at theUniversityofMarylandnearWashington.
"To break the feedback loop between sovereigns and banks, we need more risk sharing across borders in the banking system.
"In the near term, a pan-euro area facility that has the capacity to take direct stakes in banks would help."
She gave no further explanation of the idea, but said the issue is "about stability".
The region needs to strengthen its banks, "including by restoring adequate capital levels (to) stop banks from hurting sovereigns through higher debt or contingent liabilities."
Meanwhile, she said, "restoring confidence in sovereign debt helps banks, which are important holders of such debt and typically benefit from explicit or implicit guarantees from sovereigns."
IMF economist Olivier Blanchard suggested similarly in a publication released Tuesday thatEuropeneeded to put greater efforts into shoring up its banks.
"Partial public recapitalization of banks does not appear to be on the agenda anymore, but perhaps it should be," he wrote in the foreward of the IMF's semi-annual World Economic Outlook.
"To the extent that it would increase credit and activity, it could easily pay for itself -- more so than most other fiscal measures."
The IMF has been concerned that overly tight austerity policies inEurope, and the inability of capital-weak banks to lend, have pushed the eurozone into recession.
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