IMF chief warns of danger to European banks, asks for 200bn euros

The International Monetary Fund (IMF) has urged European leaders to pump up to €200 billion into their banks in order to prevent a freeze in lending and a recession. The concern is that nervous investors will continue to take their money out of Europe unless leaders do something quickly.

LONDON, ENGLAND (Catholic Online) - The IMF has been calling upon European leaders recapitalize their banks, but European governments have been reluctant to do so. Without re-capitalization, European banks remain vulnerable to a Greek default.

Antonio Borges, the IMF's European head, said "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," Borges told reporters on Wednesday, referring to the European Financial Stability Fund.

The EFSF, was established in May of last year to bail out Ireland and Portugal and is allowed to lend governments money to recapitalize banks. It is expected to secure new powers to do so, once they  are ratified by the 17 euro zone countries.

Borges warned that Europe could not ignore the reality of the situation.

France has been particularly worried that its top banks are too heavily invested in Greece. 
Borges said, ""There has been a lot of talk about French banks, but the problem is very widespread. No banking sector in the world can sustain a generalized loss of confidence and we need to restore that confidence all over Europe."

European leaders have acknowledged that confidence in Europe's banks has been deteriorating since the summer. Many investors feel that the European Union's Executive Commission, has been too lenient in its assessment of the euro zone banks.

Despite constant reassurances from European leaders, financial experts warn that the risk of Greek default is a very real possibility.

Borges said that it would be ideal if European leaders would quickly agree to a broad bank recapitalization program. "All large European banks should have a significant injection of capital under the same conditions for everyone."

However, European leaders have had great difficulty even agreeing on bailout plans for the troubled Greek government. Some have publicly suggested that Greece be allowed to have a "controlled default." However Borges warned that a Greek default would not solve their financial problems. Even if the Greek government were allowed to default on its debts the country's government and financial structure would still have to be reformed to prevent a recurrence.

In any case, the IMF is urging European leaders to act quickly, for as investors pull their money from European markets, the likelihood of a widespread in European recession grows. 

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