EU Focuses on Boosting Lending as Crisis Intensifies
European finance officials are focused on reviving the banking system to boost lending and help companies and consumers survive the worst financial crisis since the Great Depression.
“Credit is not restored in many occasions for many people and many companies — this is a matter of priority right now,” EU Economic and Monetary Affairs Commissioner Joaquin Almunia said today after a meeting of European Union finance ministers in Brussels. “We need to restore it as soon as possible.”
The euro-area economy is being dragged into its deepest recession since World War II as the credit shortage derails purchases of homes, cars and factory machinery. European banks have written off 218 billion euros ($282.6 billion) of assets since the onset of the credit crunch in August 2007, decimating their balances sheets and leaving them wary of lending.
“We are apparently moving toward the peak of the crisis and we have to act in concert and decisively,” said Austrian Finance Minister Josef Proell. “We have to open the credit channel.”
Governments shifted their attention from increasing spending and cutting taxes to support their economies after agreeing to some 200 billion euros of fiscal stimulus. “There are limits to fiscal stimulus,” said Miroslav Kalousek, the Czech finance minister who led today’s meeting. “Problems may arise as we refinance state debt.”
Public Finances
Some European governments have seen the cost of borrowing soar this year as deteriorating public finances fuel investors’ concerns that they may struggle to pay back their debts. The extra yields, or spreads, between the debt of Italy, Ireland and Spain and that of Germany have widened to the most since before the introduction of the euro in 1999.
“The risk of default” on government debt “always exists,” Almunia said yesterday. Still, “in the case of the euro-area members, I don’t think that these risks are high or significant.”
Wider spreads are an appropriate penalty for those governments that failed to consolidate their budgets when their economies were growing, Almunia added. “This is an element of market discipline that needs to be incorporated in their strategies,” he said.
European lending slowed for an 11th month in November as banks tightened credit standards to preserve their capital, the European Central Bank said. The finance ministers in Brussels today urged banks to use the billions of euros of government rescue funds to boost lending.
Capital Requirements
“The provision of capital to the banking sector is not intended to create new, higher statutory capital requirements,” the ministers said. “It should be recognized that capital provides a buffer both to withstand the challenging economic conditions and to maintain lending to creditworthy borrowers,” according to a statement issued in Brussels cheap payday advance.
“We worry about the financial sector because confidence has not yet been revived,” German Finance Minister Peer Steinbrueck told reporters.
Europe’s banks have lost 60 percent of their market value in the last six months, based on the Bloomberg Europe Banks and Financial Services Index. Commerzbank AG of Germany, Ireland’s Allied Irish Banks Plc and Austria’s Raiffeisen Zentralbank Oesterreich AG have all fallen more than 80 percent.
“Our work in this area is far from finished,” Portuguese Finance Minister Fernando Teixeira dos Santos told the meeting in Brussels today. “We’ve got to continue to work toward financial stability” and “reinforce our supervision,” he added.
Government Guarantees
Spanish Prime Minister Jose Luis Rodriguez Zapatero said this week he will meet with his country’s lenders before the end of the month to urge them to increase lending to companies and consumers. U.K. Prime Minister Gordon Brown yesterday increased his control over Royal Bank of Scotland Plc, forcing it to pledge loans of 6 billion pounds ($8.4 billion) in exchange for government guarantees on its losses.
Brown said he is “angry” that banks are rationing credit, pushing the U.K. economy into its worst contraction in more than half a century.
Other governments also have been pushed to take action. The Irish government last week decided to nationalize Anglo Irish Bank Corp. following the U.K. government’s move to take ownership of Northern Rock Plc. The German government took a 25 percent stake in Commerzbank as part of an 18.2 billion-euro bailout and the Spanish government set up a 50 billion-euro fund to buy illiquid assets from Spanish lenders.
Record Low
The euro-area economy will shrink 1.9 percent this year and the U.K. economy will contract 2.8 percent, EU projections released yesterday show. That would be the biggest contraction since 1945, according to economists at RBS. European economic confidence is at a record low and services and manufacturing activity contracted for a seventh month in December.
At today’s meeting, Germany said it is willing to support a French initiative to reduce value-added tax on some labor- intensive industries including restaurants, opening the door for an EU-wide agreement. Successive German governments had blocked the initiative since at least 2002.
The finance ministers endorsed a 3.1 billion-euro loan to Latvia to help that country weather the financial crisis. The loan is part of a 7.5 billion-euro aid package from a group led by the EU and the International Monetary Fund.
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