The EU executive is proposing “coordinated action” to the 27 EU nations to recapitalize banks, European Commission President Jose Manuel Barroso said yesterday.
“We are now proposing to the member states to have a coordinated action to recapitalize banks and get rid of toxic assets they may have,” Barroso said in a television interview.
The statement came after France and Belgium this week agreed to bail out Dexia, the first European bank to be dragged down by the eurozone debt crisis — and which also had to be -rescued in 2008.
The debt crisis, beginning in Greece, has snared Ireland and Portugal and put Italy and Spain in the firing line too, threatening to sink the whole euro project as banks exposed to their debt find it impossible to raise funding.
The resulting “credit crunch” has sparked warnings that there could be a replay of 2008 when US investment bank Lehman Brothers collapsed, nearly taking the global financial system with it, but for massive government support.
On Wednesday, German Chancellor Angela Merkel called on her EU partners to recapitalize the banking sector to help prevent the eurozone debt crisis spreading.
Merkel said helping the banks was “justified, if we have a joint approach,” giving nervous financial markets an immediate boost after days of heavy losses on fears the banking sector needs help urgently.
It “is important for the markets that we achieve results ... time is pressing and we have to act quickly,” she said.
Meanwhile, eurozone banks continued to deposit large amounts of overnight funds at the European Central Bank (ECB) official data showed yesterday, in a signal that banks are wary of lending to each other.
Banks put 221.35 billion euros (US$294 billion) on deposit for 24 hours at the ECB on -Wednesday, the largest amount this year, against a background of renewed concerns about the eurozone debt crisis.
The level of these deposits at the central bank is an indicator of the reluctance of banks to lend to each other on the pivotal interbank market and levels have been topping new highs this week as European governments draw up possible plans of action to avert a potential collapse of the banking sector.
“Banks’ confidence is waning and they’re unwilling to lend each other money,” German banking federation chief Andreas Schmitz told Deutschlandfunk public radio yesterday.
“Market players are telling themselves it’s safer to place money with the ECB,” Schmitz said.