Europe must deal urgently with Spain's banking problems, which hang like a dark cloud threatening global economic recovery, Sweden's Finance Minister Anders Borg said on Monday.
Failure to recapitalize Spanish banks quickly could throw Madrid into a bailout program, even though its current fiscal situation is manageable, Borg told the Peterson Institute for International Economics.
Solvent banks need their core capital shored up, problem banks need resolving and the European Central Bank needs to show flexibility by providing liquidity support, he said in addressing the institute.
"They (Spanish authorities) have to move on these issues because the uncertainty that we are now seeing in the stock market and in the world economy is to a degree that there is a banking cloud hanging over the recovery," he said.
The euro zone fiscal crisis is abating and banks -- particularly in Spain where bad loans have risen to 8.2 percent of outstanding portfolios and analysts estimate that $50 billion is required to sort out the problems -- now pose the greatest threat, Borg said.
European shares fell to a three-month low on Monday, and euro zone banks sank nearly 4 percent to levels last seen in late November. Investors were roiled by the collapse of the Dutch government over budgets and fears over Spanish banks.
Borg said policymakers have the capacity to tackle the banking problems, and the method -- be it direct injection of capital into Spanish banks or through its government -- is less important than the speed of action.
"We now have an European firewall and we have an IMF firewall, so the resources are there. But I think it is urgent to deal with these remaining bank issues, otherwise there is clear risk to the recovery," he said.
The International Monetary Fund this past weekend won promises of $430 billion to strengthen its crisis-fighting funds and the European Union has set up a $1 trillion bailout fund giving financial policymakers the capacity to prevent a worsening of the euro zone's sovereign debt crisis.
The IMF has proposed that the EU directly recapitalize banks and close troubled institutions, combined with EU-wide bank supervision. While Borg said he would be "very happy" for centralized bank supervision, he doubted it is politically feasible in the next six months when it is opposed by UK officials, France is in the middle of a presidential election and the Dutch government has collapsed.
"If that cannot be done in a short period of time, then I think we need another flexible way to do it," he said.
Spain's finance ministry and central bank are competent and well aware of the problems, he said, but must determine a course of action. Failure to tackle Spain's banking problems threatens to push the country into an EU-IMF bailout program, like Greece, Ireland and Portugal, he warned.
"Spain is not in the same situation as Greece. Let's not force it into a program because they don't need a program, but sort out the banks. Identify the problem and then inject capital," Borg said.
ECB HAS ROOM
The ECB can help facilitate a resolution of the banks now that the euro area's fiscal situation is improving and as long as inflation expectations remain well anchored around 2 percent. "They have some leeway to very active," Borg said.
He welcomed the ECB's actions to date in providing three-year funding at low cost to banks in the euro area. "I would support them being more flexible as they are; I would trust them to take the right decision," he said. But they must be left to make their own decision without political pressure.
"If (ECB President) Mario Draghi and the ECB are going to be flexible, we cannot have French candidates attacking central banks for not taking growth into account," Borg said referring to calls for a pro-growth role for the ECB from French President Nicolas Sarkozy, who is battling against socialist candidate Francois Hollande.
"The less politicians attack central banks, the more flexible the bank will be," Borg said.
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