The EU conceded Tuesday that its previous bank stress tests were not stringent enough as it confirmed that it will start a new round in February, while the continent's strongest economies bet they can sort out the region's debt crisis without the need to top up bailout funds.
Germany, backed by the Netherlands and Austria, is refusing to increase the 750 billion euro ($1 trillion) bailout fund set up to help euro members that run out of money or back calls for a new pan-European bond. Instead, they are saying it's now time to implement the decisions taken in recent months.
"It doesn't make sense to constantly start new debates," said German Finance Minister Wolfgang Schaeuble following a two-day meeting with his European counterparts.
Given the refusal of a number of countries to back fresh "shock and awe" measures putting up new money to deal with the crisis, the EU is now counting on highly indebted states like Spain and Portugal to press ahead with deep austerity measures. Meanwhile, the EU is working to contain risks from spreading from the banking sector.
As a result, it decided to conduct a new round of stress tests on Europe's banks from February.
Olli Rehn, the top monetary official in the EU, said these will be "more rigorous and more comprehensive" than those conducted on 91 banks in July and will crucially assess a bank's liquidity position, which the earlier version did not.
"The scope and methodology of the exercise are currently under discussion but of course we will draw lessons from the exercise earlier this year," Rehn said.
Rehn would not say whether the results will be published in the same manner as those in July, but added that his preference was for full transparency — there have been some calls to keep the results under wraps and allow banks to sort out their finances away from the glare of publicity.
July's stress tests have come under criticism after the bailout of Ireland last month was predicated largely on revelations of worse financial problems afflicting its banks. All the Irish banks assessed in July were given a clean bill of health as only seven of the 91 banks tested failed.
As a result, investors continue to fret about the financial health of many of Europe's financial institutions and how they impact on governments' potential liabilities.
The most acute concerns centre on Portugal and Spain, widely viewed as the weakest links in the 16-country currency union.
Many analysts have warned that the region's existing emergency rescue fund would be too small to save Spain, Europe's third largest economy.
But European officials insist that they have the necessary tools to deal with further crises, as long as the region's highly indebted countries get their finances back into shape.
"The best defense against any contagion effect is improving our budgetary positions to meet the agreed fiscal targets and reduce public debt," Rehn said.
In Dublin, parliament is due to vote Tuesday night on the budget for next year — the measures proposed by the Irish government are the harshest in the country's history but are required in return for a 67.5 billion euro rescue package.
For many of the bloc's ministers, that's far more important than increasing the size of Europe's bailout funds.
"If we are not addressing the long-term and midterm solutions as well, the markets will never be able to completely restore the confidence they have into the eurozone," said Dutch Finance Minister Jan Kees de Jager.
The pressure on the EU's finance ministers has abated somewhat as the euro has recovered much of its lost ground and the cost of servicing debt in countries like Portugal has come down from record euro-era highs.
This easing in tensions in part came after the European Central Bank decided to play a more active role in the markets. Figures Monday confirmed widespread speculation that the bank has stepped up its purchases of government bonds. In the week to Nov 30, it bought 1.965 euros of government bonds — a 22-week high — as it tried to boost confidence in the single currency bloc following the Irish bailout and renewed contagion fears.
Next week's figures will be key as they will contain purchases by the bank last Friday, Dec. 2, when it held its monthly policy meeting.
Market participants suspect the stabilization in European bond markets since the meeting has been largely thanks to greater bond purchases by the central bank, under pressure from policymakers to do more to prevent the debt crisis from spreading — buying bonds supports their prices, taking pressure off the banks that hold them. It also lowers bond yields, which indicate the borrowing costs countries would face were they to go into the market for more credit.
The ECB is widely expected to continue playing this more active role in the secondary markets over the weeks ahead.
"There is little reason to assume they are about to disappear anytime soon," said Daragh Maher, an analyst at Credit Agricole.
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