Europe's banks faced mounting pressure today to boost their coffers to cope with the euro zone debt crisis amid the rising likelihood that they will have to take bigger losses on Greek debt.
As Greek Prime Minister George Papandreou held talks with EU leaders in Brussels, euro zone officials raced to finalise a response ahead of an October 23 summit to resolve a crisis threatening to spark a new global recession.
The head of one major lender, Germany's Deutsche Bank, voiced reluctance to recapitalise, saying the debate was "counterproductive" and that it was up to governments to restore confidence in public finances.
In Paris, the French finance ministry said banks exposed to Greek debt will probably be forced to write off more than the 21% so far proposed in a July euro zone accord on a second bail-out for Athens.
"The discussions are on a cut of 50%," a source from a European government said, adding that this was a maximum level and the figure could be lower.
On another front, Slovakia was set to hold a new vote on expanding the eurozone's rescue fund later today or tomorrow after parliament rejected it earlier this week. Slovakia is the last country in the 17-nation euro zone that needs to approve the European Financial Stability Facility (EFSF), the single currency area's main weapon against the crisis.
With a major EU summit set for October 23 and a G20 meeting next month, EU officials are working on a raft of ideas to soothe international concerns. "We believe that we have to be stronger in our response.
It has to be a decisive, comprehensive response," European Commission president Jose Manuel Barroso said today. "We have very similar views on what needs to be done to support Greece inside Europe, to give maximum possible flexibility to the EFSF, to beef up European Union banks' capital positions," Barroso said.
With the unrelenting crisis now threatening Europe's banking system, Barroso is calling for the urgent recapitalisation of banks so they can weather the sovereign debt storm. Barroso wants banks to try first to tap the private market to beef up their capital, with support from governments if necessary. If such support is unavailable, the revamped EFSF, once it is ratified, could provide loans.
Barroso did not give a figure but a European source said the commission wants banks to raise their core capital to 9% within three to six months, above the 7% level lenders are working on under international reforms.
Another possible European Commission proposal, an EU source said, would see the EFSF's firepower multiplied by up to fivefold, or to €2.5 trillion, but without governments providing new guarantees.
Fitch cuts ratings on British lenders RBS, Lloyds
Fitch has lowered its ratings for British state-rescued lenders Royal Bank of Scotland and Lloyds, citing the reduced likelihood of further government support.
The move "reflects Fitch's view that support dynamics are changing in the UK," Fitch said in the statement. Fitch said it had lowered its support rating floors (SRF) for systemically important UK banks to 'A' from 'AA-' and 'A+'.
As a result, the agency cut the long-term issuer default ratings for both Lloyds Banking Group (LBG) and Royal Bank of Scotland (RBS) to 'A' from 'AA-'. Fitch has also placed Barclays on ratings watch negative.
"The banking system is not only large relative to the UK economy, but there is also more advanced political will to reduce the implicit support for the country's banks," Fitch said.
The news came a week after Moody's downgraded its ratings for a dozen British lenders, including RBS and LBG, and cited the "significantly reduced" chances of further support over the medium- to long-term.
