EU fund ‘may be used to capitalise banks’

NATIONAL governments could tap part of the EU’s bailout fund to recapitalise banks following the stress tests if they fail to raise the money on the markets, Commission sources have suggested.

The Department of Finance has said it does not believe it will be needed in Ireland as Irish banks have been thoroughly tested. Bank of Ireland has already raised the additional capital it was deemed to need and AIB is in the process of doing so.

Major banks in all member states are being stress tested. The results will be published to reduce uncertainty about their health.

German lander banks would prefer not to publish but are under pressure to do so, as are the Cajas banks of Spain, many of which are in difficulties because of the collapse of the housing market.

The commission source said that as soon as the results were published, it was important to have a “backstop” ready. The first call should be national stabilisation funds – in Spain this would be €9 billion of equity and €90bn to be raised from the markets.

But if this was not enough, it is understood that the commission believes the European Stabilisation Facility should be used – but preferably just the commission’s €60bn share of the €750bn EU-IMF bailout fund.

Officials are trying to ensure the tests are the same across all member states and are published simultaneously, possibly by July 16. The work is being carried out by the national regulators using a common methodology and coordinated between the commission, the European Banking Supervisors and the ECB.

Economic and monetary affairs commissioner, Olli Rehn, told the European Parliament last night that he favoured the publication of the results by the end of July. “This will help reduce the uncertainty and restore confidence. In parallel, both national and EU financial backstops – the European Financial Stability Mechanism and Facility – have been put in place”.

Mr Rehn warned that the EU was not out of the woods yet. “We need to maintain vigilance in fire-fighting.” But he believed that fears of a double dip were exaggerated as the underlying basic trend in the real economy was upwards while data from some hard-hit countries like Ireland and Spain has been encouraging.

To strengthen the economic recovery meant restoring and reinforcing confidence by safeguarding financial stability, pursuing growth-friendly fiscal consolidation, conclude financial repair and reform, reinforce economic governance and also advance structural reforms.