EU presses banks to beef up coffers

Europe breathed easier after Slovak parties agreed to hold a new vote this week on overhauling the European Financial Stability Facility (EFSF), and markets reacted to proposals to battle the crisis and reports the fund's firepower may be boosted considerably.

The market appears "a little bit more optimistic that Europe is going to get... together on the banking crisis", said David Gilmore, analyst at New York's Foreign Exchange Analytics.

In New York the euro rose after markets closed higher in Europe, with Paris climbing 2.42 per cent and Frankfurt up 2.21 per cent on news of calls for bank recapitalisation and a second vote by Friday in Slovakia to ratify more powers for the EFSF.

After topping $1.38 during the day, the euro was at $1.3788 around 2100 GMT, up from $1.3660 at the same time Tuesday.

Slovakia is the last hold-out of the 17 nations sharing the embattled euro whose green light is needed to beef up the rescue shield.

EU leaders had pressed for a new vote in the wake of warnings from the United States and China for Europe to get its house in order quickly for the sake of a weakening global economy.

"The world economy is heavily affected by the financial crisis and every EU country must contribute its share to the fight against the debt crisis," German Chancellor Angela Merkel said during a visit in Vietnam.

She said she was confident the expanded bailout fund would be ratified this month. The EU holds a summit October 23 focused on finalising its crisis response ahead of a G20 meeting in early November.

With the unrelenting crisis now threatening Europe's banking system, European Commission president Jose Manuel Barroso said banks "urgently" need to recapitalise to weather the sovereign debt storm.

Banks that fail to do so should be barred from distributing bonuses and dividends, he said.

Barroso said banks should first try to tap the private market to beef up their capital, with support from governments if necessary. If such support is unavailable, the EFSF, once it is ratified, could provide loans.

He did not give a figure but a European source said the commission wants banks to raise their core capital to 9.0 per cent, above the 7.0 per cent level lenders are working to attain under international reforms.

France and Germany have pledged to agree a plan to shore up banks by the end of the month but have not given any details as yet.

Germany's private banking association sharply criticised Barroso's proposals, saying they fail to address the root problems of the debt crisis and could undermine efforts to shore up banks.

"A ban on distributing dividends will be counter-productive as it will complicate raising capital on the market," said BdB director Michael Kemmer.

EU sources meanwhile told AFP the eurozone was mulling ways of multiplying by up to fivefold, or to 2.5 trillion euros ($3.5 trillion), the firepower of the EFSF, without governments providing new guarantees.

One option to "leverage" the EFSF's potential financial impact would see the EFSF insure holders of bonds from indebted states "up to 15 or 20 per cent for instance", thus covering part of their losses should a nation default.

In this case, where the EFSF would play the role of guarantor, "experts believe we could multiply by three, four or five the Fund's intervention capability," a source said.

The EFSF, created to shore up distressed nations after the eurozone bailed out Greece in May 2010, currently has an effective lending capacity of around 250 billion.

This is to be boosted to 440 billion euros once all 17 euro nations have ratified a July accord to enhance and increase its scope.

It is to be replaced by the European Stability Mechanism (ESM) between mid-2012 and mid-2013, which would have a lending capacity of 500 billion euros. Through leverage this could be raised to 2.5 trillion euros.

Eurozone leaders agreed in July to boost the EFSF's powers in the hope of stemming the fallout from the eurozone's sovereign debt crisis, which now threatens the entire euro project.

The new-look EFSF would be able to inject money into shaky banks or intervene instead of the European Central Bank (ECB) to support weaker eurozone countries facing problems in raising fresh funds on the markets.

Greece faces the acutest problems in rolling over its mountain of debt as financial markets fret over a potentially disastrous default and contagion.

But in Italy, Bank of Italy governor and future head of the European Central Bank Mario Draghi called Wednesday on Prime Minister Silvio Berlusconi's government to act fast to save the eurozone's third largest country from the debt crisis.

As protesters against the country's severe austerity cuts clamoured outside the bank's gates, Draghi said the key to strengthening Italy's position in Europe was to "boost growth and dramatically reduce debt."