The head of head IMF Christine Lagarde has called on EU banks to raise more funds and to increase theirequity so that they can weather a potential financial storm.
With recessions likely in he EU and possible in the US, EU banks are vulnerable to financialshocks as many of them own Sovereign debt of countries such as Greece, Span and Portugal.
After Greek banks had to tap in the Emergency Loan Arrangement (ELA), the cost of Greece borrowing on open makets soared. This event happened despite the ECB buying bonds of the 3 bailout countries Portugal,Ireland and Greece, in addition to Italy and Spain. The move helped to drive down yields on these countries bonds.
The German President was critical of the ECB interevention and stated that it violated the rules of the EU. On September 7th the German High Court will rule if the EFSF which was set up with 440 Billion Euros to purchase bonds ad prevent the need for bailouts in countries such as Italy and Spain.
His sentiment is shared by a growing number of Germans including those in Angela Merkel’s party.
The calls for the European Finance Stabilization Fund to grow from its current 445 Billion Euros to 2.2 Trillion Euros is more unlikely.Like the Finns some Germans want collateral from Greece including its gold in exchange for its second bailout which would put the total to over 260 Billion Euros.
Germany has the largest economy in Europe and a debt to GDP ration of 83%, there are concerns that the country itself may reach a breaking point if it has to keep sumping up cash to bailout other nations.
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