EU working on $150 billion bank recapitalisation
AFP, Sunday 23 Oct 2011
Outline for deal would see billions pumped in to bring lender core cash reserves up to nine per cent of holdings


European governments have identified a $150 billion hole needing to be filled in bank books hit hard by write-downs on Greek debt, a diplomat said after 10 hours of crunch talks in Brussels.

The outline of a deal for national treasuries to recapitalise banks seen as having systemic importance would see "107-108 billion euros" pumped in to bring lenders' core cash reserves up to a newly raised nine per cent of holdings.

The news came just as the leaders of France and Germany readied for head-to-head talks on the crisis outside Brussels, despite resistance from Spain, Italy and Portugal.

Another diplomat said each had to be taken for separate "little huddles" with the European Banking Authority and the European Central Bank to "explain the reasons."

Having argued strenuously for the primacy of national treasuries and ministries taking such decisions, British Finance Minister George Osborne emerged happy, ahead of back-to-back EU summits Sunday and Wednesday.

"We have made real progress and we have come to important decisions on strengthening European banks," he said.

"That's just one part of the package and obviously there is more work to do," he underlined, promising that London"will be keeping up the pressure over the next couple of days" to craft a lasting solution to the debt crisis.

Italy, Spain and Portugal were the most vocal opponents to the proposal, given the cost of plugging holes in their banking sector, diplomats said.

The final deal is largely dependent on parallel, but separate talks on a write-down of reportedly at least 50 per cent of the Greek debt held by banks: in exchange, Greece would get new rescue loans from the European Union and the International Monetary Fund.

But many Italian and Spanish banks, like the French, have seen their credit rating downgraded in recent weeks as fears rise over their exposure to sovereign debt.

The European Commission, the EU executive, wants banks to raise their core cash reserves to nine per cent. But the idea of forced recapitalisation has been poorly received by the banking community.

The European Banking Authority (EBA) had initially estimated that between 80 and 100 billion euros would be needed, although the IMF had estimated at least twice this amount.

Another diplomat said Spain had insisted that no deal was possible on recapitalisation until the "haircut" -- the extent of Greek losses -- had been agreed.

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