EU to force banks to raise $148 billion

Posted Oct. 26, 2011, at 7:56 p.m.

BRUSSELS — Big banks across Europe will have to raise 106 billion euros to better withstand the turmoil of the debt crisis, preliminary figures showed, while eurozone leaders neared a deal to boost their bailout fund to over 1 trillion euros, a senior official said Wednesday.

The deal to force banks in the European Union to boost their rainy-day funds amid worsening market turmoil is a key part of a broader plan to solve the debt crisis that leaders have promised.

It was, however, only one third of a broader strategy which is expected to also include reducing Greece’s debt load and boosting the eurozone’s bailout fund.

After much delay, talks on the bailout fund finally saw some progress. The leaders of the 17-country eurozone want to give the fund, the 440 billion euros European Financial Stability Facility, more firepower so it can stop the crisis from engulfing big countries like Italy and Spain. The question was how to do it with the most impact and the least risk for taxpayers.

A senior eurozone official said that consensus was emerging to allow the EFSF to insure private investors against the first 25 percent of losses on purchases of government bonds and other investments linked to helping the eurozone.

After contributing to the bailouts of Ireland, Portugal and Greece, the EFSF will have only about 270 billion euros left. A scheme to provide insurance on bond issues could multiply the impact of the EFSF’s lending power to over 1 trillion euros, the official said, since it would make those bonds safer investments and attract demand.

The official, who was speaking on condition of anonymity because negotiations were still ongoing, cautioned however that the EFSF leveraging would not be agreed until other parts of the plan were nailed down.

In addition to acting as a direct insurer of bond issues from wobbly countries like Italy and Spain, the EFSF insurance scheme is also supposed to entice big institutional investors to contribute to a special fund that could be used to buy government bonds but also to help states recapitalize weak banks.

Such outside help may be necessary for Italy and Spain, whose banks were facing some of the biggest capital shortfalls.

Spanish banks have to raise 26.2 billion euros, according to preliminary estimates from the European Banking Authority, while Italian banks must find 14.8 billion euros. A shortfall of 30 billion euros in capital in Greek banks should be covered by the country’s existing bailout program. The EBA said the figures were based on preliminary calculations and would be updated in November.

The official said there was still a lot of disagreement on how to cut Greece’s massive debt, one of the other key issues.

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