Europe wakes up to need for bank aid plan

By John O'Donnell and Jan Strupczewski

BRUSSELS (Reuters) - It was a problem that Europe hoped would go away but after months of inaction, the EU has begun working on a scheme to shore up the region's battered lenders as it battles to solve an intractable debt crisis.

A creeping freeze in interbank lending, crucial to finance, and the shunning of European lenders on money markets has increased the problems of the region's banks, already burdened with billions of euros of risky loans.

Having long played down those difficulties, the European Union is getting into gear.

"There is a general consensus that this is urgent, and should be done in the next few weeks."

Borges said Europe needed to pump as much as 200 billion euros into its banks.

Germany has also said it wants quick action to come up with plans for bank backstops -- state capital injections.

"Germany is prepared to move to recapitalization," Chancellor Angela Merkel said on Wednesday. "We need criteria. We are under pressure of time. I think we need to take a decision quickly."

The EU may turn to the European Financial Stability Facility (EFSF), a fund set up by euro zone countries to help states in trouble and which is to be given powers this month to lend to governments for recapitalizing weak banks.

"Whether the money comes from the national treasuries or, in the final instance, from the EFSF, is to be decided, country by country possibly," Borges said.

His message about a grand plan echoed comments by the EU's Economic Commissioner Olli Rehn who spoke earlier in the week of a "concerted, coordinated approach" on the question of bank capital.

But the European Commission later played this down. "The Commission has always been pushing for bank recapitalizations and is advocating a European approach," said one official. "That's all. There is no big master plan."

The nervousness at the Commission, which is attempting to coordinate the European response to the crisis, is prompted by concern that deep divisions in Europe on the issue could see any pan-European push to bolster banks unravel.


Until now, both France and Germany, whose support is decisive in agreeing a single approach, have been reluctant to consider recapitalizing their own banks.

"I don't see the EFSF as ideal instrument for bank recapitalizations," said one top German banker. "Why should German taxpayers pay for problems of Greek banks? Every country should bring its own house in order."

A board member at a German bank agreed.

"There is no recapitalization plan for European banks, because such a plan is simply not realistic," he said. "The EFSF can't be big enough to save all banks. Every country has to safeguard its own banks."

France too is hesitant, but for different reasons. The country is economically weaker than Germany and grappling with heavy public debts.

France's top banks - BNP Paribas <BNPP.PA>, Societe Generale <SOGN.PA> and Credit Agricole <CAGR.PA> -- have seen their stock price roughly halve since the start of the year. Franco-Belgian bank Dexia <DEXI.BR> faces possible break-up and may need to be propped up with extra state cash.

Nonetheless, Bank of France Governor Christian Noyer declared French banks to be generally in good health.

Rather than injecting capital, the government would prefer to resurrect a scheme used at the beginning of the banking crisis in 2008, offering funding guarantees and buying preference shares in banks, a type of loan that counts as capital.

Germany has used a combination of guarantees and equity, mostly without taking shareholdings. It has only fully nationalized one bank in the crisis although many more were badly hit.

These solutions have helped Berlin and Paris avoid becoming entangled with their banks -- both expensive and politically embarrassing.

"The EFSF cannot be a magic solution because its charter does not allow countries that are contributing to it to actually use it at the same time," said one economist, who asked not to be identified.

"The likeliest outcome is that France and Germany, via the EFSF, will shoulder the burden of bolstering banks in the periphery of the euro zone and will in turn recapitalize their own banks outside the EFSF framework."

"I don't want to see a coordinated plan with lots of national schemes. I want one European plan -- one European institution that recapitalizes the banks.

"The EFSF now has to give money to countries. But it should be able to capitalize banks itself. Which bank wants the Italian government, for example, as a shareholder? And which weak government wants to be a shareholder in a bank?"

Whether helping the banks with extra capital succeeds in helping to revive market confidence may ultimately depend on whether investors in Greek debt are forced to take bigger losses.

Should this happen, insulating banks and other European countries may prove difficult, if not impossible, one EU official said.

"There is very little you can do. No one knows where money would run to in a situation like that. The reason (U.S. Treasury Secretary Timothy) Geithner came to Poland is because he does not have any wall (to stop contagion). Neither does the UK."

(Reporting by John O'Donnell, Jan Strupczewski, Robin Emmott and Julien Toyer in Brussels, Philipp Halstrick in Frankfurt, editing by Mike Peacock)