A plan without a man

5 October 2011 By Peter Thal Larsen Follow @Peter_TL

Boosting the capital of euro zone banks is necessary to rebuilding confidence. A U.S.-style plan, where all lenders are forced to accept some equity, is probably the best approach. But given the lack of a central authority, political commitment to act together is more important.

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The German government is ready to capitalise its banks if needed, chancellor Angela Merkel said on Oct. 5, after euro zone finance ministers agreed to safeguard their banks to cope with the fallout from a possible Greek default.
“The German government – as the finance minister has made very clear in the last two days – stands ready to implement such a capitalisation of the banks if it is needed,” Merkel said.
Olli Rehn, Europe’s commissioner for economic affairs, told the Financial Times that ministers increasingly shared the view that Europe needed to take a co-ordinated approach to the problem.
The International Monetary Fund on Oct. 5 said European banks needed 100 billion to 200 billion euros to restore confidence in the financial sector and avert a looming credit crunch.
“We are talking about figures of between 100 and 200 billion euros, which in our view is very, very small compared to the size of the European capital markets and compared to the resources of the new, enhanced EFSF,” Antonio Borges, the IMF’s European head, told Reuters during a visit to Brussels, referring to the euro zone’s 440 billion euro rescue fund, the European Financial Stability Fund (EFSF).

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