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In about-face, EU says banks may need capital boost

(BRUSSELS) - The European Commission warned on Tuesday that more banks may need a capital boost to cope with the eurozone debt crisis, reversing course after rebuffing the IMF on the health of lenders.

"Sadly, as the sovereign debt worsens, more banks may need to be recapitalised, on top of the nine signalled in the July stress tests," European Union Competition Commission Joaquin Almunia said in a prepared speech.

Almunia said he would propose later this year to extend rules that were put in place during the 2008 financial crisis to enable governments to provide state aid to their banks, if necessary, beyond this year.

"Of course, banks should first try to finance themselves on the markets, and take all possible measures like the sale of subsidiaries and limitation of dividends, before they turn to the use of public backstops, which should be used as a last resort," he added.

"I would have preferred to go back to normal rules sooner and this was indeed my intention until the summer. But the situation we are facing these days calls for an extension of the existing state aid crisis regime."

Brussels had previously rebuffed calls by IMF chief Christine Lagarde for an urgent recapitalisation of European banks, with EU officials saying stress tests on their ability to withstand future crises showed most were adequately funded.

The services of EU Economic Affairs Commissioner Olli Rehn insisted recently that European banks were better capitalised than a year ago.

But in a reversal, Almunia said on Tuesday: "The worsening of the sovereign debt crisis, its impact on a fragile banking system and the continuing tensions in funding markets, all point to the possible need for further recapitalisation of banks on top of the nine that failed the stress tests earlier this year."

The IMF, in a report on the world economy that coincided with Almunia's remarks, repeated its concerns on Tuesday with a warming that European banks were "heavily exposed" to countries facing rising borrowing costs.

"A concern is that capitalisation of euro area banks is relatively low, and they rely heavily on wholesale funding, which is prone to freezing during financial turmoil," the report said.

"Trouble in a few sovereigns could thus quickly spread across Europe. From there it could move to the United States -- by way of US institutional investors' holdings of European assets -- and to the rest of the world."

IMF chief economist Olivier Blanchard later said that "it seems there's been a 180 degree turnaround in a series of countries in response to our analysis," in comments made on France 24 television.

Some EU finance ministers echoed the IMF's concerns at a weekend meeting in Wroclaw, Poland, focused on the debt crisis, with Spain's Elena Salgado and Sweden's Anders Borg calling for a recapitalisation.

The ministers, however, failed to iron out differences over a new rescue package for Greece despite mounting market expectations that the country will default on its debt.

Leading central banks took action last week to inject dollars into European banks struggling to raise US currency from lenders wary of their exposure to the crisis.

The Fitch credit ratings agency cautioned that if the heightened market risk aversion persists longer, "pressure on liquidity, profitability and eventually capital positions will negatively affect banks' credit profiles and ratings."

Almunia called for a rapid solution to the sovereign debt crisis "without any further delay."

"Without a quick solution, the final bill will only grow bigger and banks will not be able to fulfil their key role of financing the economic growth," he said.

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