IMF Sees 300 Billion-Euro Credit Risk to Europe Banks

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September 21, 2011, 11:18 AM EDT By Sandrine Rastello

(Updates with comments from IMF official in paragraphs 10- 12 and markets in graph 13. See {GMEET } for more on the IMF meetings.)

Sept. 21 (Bloomberg) -- The European debt crisis has generated as much as 300 billion euros ($410 billion) in credit risk for European banks, the International Monetary Fund said, calling for capital injections to reassure investors and support lending.

Political squabbling in Europe over ways to fight contagion and delays in implementing agreed measures are raising concerns about the risk of defaults by governments, the IMF said. Banks in turn face “funding challenges” because of investor concern about their potential losses from government bonds they hold, with some relying heavily on the European Central Bank for liquidity, it said.

“A number of banks must raise capital to help ensure the confidence of their creditors and depositors,” the IMF wrote in its Global Financial Stability Report released today. “Without additional capital buffers, problems in accessing funding are likely to create deleveraging pressures at banks, which will force them to cut credit to the real economy.”

The Washington-based IMF yesterday cut its global growth forecast and predicted “severe’ repercussions if policy makers fail to stem the debt turmoil that’s threatening to engulf Italy and Spain. Bank recapitalization, through public injections if necessary, should come in addition to “credible” strategies by governments to reduce their public debt, the IMF said today.

Japan, U.K.

The ECB and peers in the U.K., Switzerland, Japan and the U.S. last week said they’ll provide unlimited three-month money to lenders in three tenders starting October. That was after funding dried up for European banks in general, and French lenders in particular, amid concern Greece is headed for a default.

Credit Agricole SA and Societe Generale SA had their long- term credit ratings cut one level this week by Moody’s Investors Service, which cited their reliance on short-term funding and Greek exposure.

The fund said its assessment of the potential credit risks of European banks isn’t a calculation of their capital needs, which would require a “fully fledged stress test.” It said its analysis was based on published data from the European Banking Authority’s stress test and Bank for International Settlements figures.

U.S., IMF

The IMF also called on the U.S. and Japan to craft fiscal plans for the medium term, “particularly given the many adverse global economic and financial repercussions that would follow from failure to adequately deal with U.S. fiscal problems.”

The IMF is not judging the European stress tests published earlier this year, said Jose Vinals, the head of the agency and capital markets department.

“Since then, things have changed,” he told reporters in Washington today. The IMF is “not estimating the amount of capital that is needed in European Union banks” and is rather saying “that there is a significant spillover of sovereign risk into banks and that this is something that is creating market strains.”

“This is something which supervisors will need to look at very carefully and then decide what is the size of capital buffers that the banks must get in order to get funding in appropriate conditions,” Vinals said.

The Standard & Poor’s 500 Index fell 0.4 percent to 1,197.90 at 10:44 a.m. in New York. The yield on the 10-year Treasury note fell to 1.92 percent from 1.94 percent late yesterday.

Emerging Markets

Emerging-market banks are not sheltered from the consequences of weaker global growth, the IMF said. It estimated that their capital adequacy could be dented by 6 percentage points under a scenario that combines several shocks.

Calls by IMF Managing Director Christine Lagarde to recapitalize European banks where shunned by officials from Germany to Spain, with ECB President Jean-Claude Trichet describing the fund’s methodology on capital as different from his own institution’s.

Analysts at Credit Suisse Group AG in a Sept. 15 research note estimated that European banks may have a capital deficit of 165 billion euros at the end of 2012 “given higher regulatory capital demands and funding markets requiring larger capital cushions.”

The IMF analysis measured the size of spillover on banks from credit-related strains in the bond markets of Greece, Ireland, Portugal, Belgium, Italy and Spain and used spreads on credit default swaps.

The IMF said banks’ “spillover” from sovereign debt alone amounts to about 200 billion euros. Adding banks’ holdings of bank assets whose value has also fallen in the crisis countries brings the total as high as 300 billion euros.

--With assistance from Fabio Benedetti-Valentini in Paris and Sonia Sirletti in Milan. Editors: Gail DeGeorge, Kevin Costelloe

To contact the reporter responsible for this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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