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IMF chief tells Europe: you must bail out the banks again

IMF says debt crisis has cost institutions €300bn as bank shares plummet on new market fears for global economy

Christine Lagarde, the managing director of the International Monetary Fund, urged Europe’s leaders to bail out their fragile banks, as the boss of the eurozone’s biggest bank, BNP Paribas, rejected fears that the financial sector is “in peril”.

Addressing journalists in Washington at the opening of the IMF’s annual meeting, Lagarde said that Europe must tackle “this twin problem of sovereign debt and the need to strengthen capital buffers”.

She said: “It is critical that to fuel growth banks be in a position to finance the economy, to finance enterprises, to finance households, to finance local governments. To do that they need to have the balance sheet that will actually support credit to the economy.”

Despite the recent stress tests carried out by the European Banking Authority, which suggested that most of the banks were well-placed to cope with the sovereign debt crisis, the IMF estimates that banks have taken a €300bn (£260bn) hit in the past year as a result of the growing risk of default by Greece and other vulnerable eurozone countries.

Lagarde’s call came as Baudouin Prot, BNP’s chief executive, emphatically denied reports that it was in talks with Middle Eastern investors about securing a capital injection. “I formally deny this,” he said. “We have no particular contact because we don’t need a capital increase.”

But French bank shares – which have lost 50% of their value in three months – continued to fall as markets endured one of their worst trading days since 2009. BNP was off more than 5% and close rival Société Générale fell almost 10%.

In the UK, bailed-out Lloyds Banking Group was down more than 10%, bearing the brunt of anxiety about a slowdown in economic growth. The FTSE 100 closed down 4.7% with large falls from mining companies, which make up a large part of the index and whose fortunes are closely tied to global economic prospects. Out of the 100 stocks only technology company Autonomy – supported by a bid from Hewlett-Packard – fell by less than 1%.

A survey from the crucial manufacturing sector, which George Osborne had hoped would lead an economic recovery, exacerbated the nervous mood by suggesting industry had been hit hard by the collapse of confidence around the world.

The CBI’s monthly industrial trades survey showed declining orders, both at home and abroad, and a rising backlog of finished goods, in the latest evidence that the recovery has stalled.

Minutes from the latest meeting of the Bank of England’s monetary policy committee revealed on Wednesday that policymakers are preparing a new round of quantitative easing to respond to the worsening outlook.

The gloom was echoed in the eurozone, where the early, “flash estimates” from the closely watched purchasing managers surveys signalled a sharp downturn in both manufacturing and services growth, adding to fears that Europe could be heading for a new recession.

The Greek government announced new austerity measures this week to persuade investors that it is committed to tackling its debts. But investors are still fretting about the potentially devastating impact of a default on the region’s banks.

BNP insisted on Thursday that it could maintain a core tier one ratio – an important measure of financial strength – of 9% by January 2013 even if it sustained losses through the eurozone crisis.

But Mohamed El-Erian, boss of the world’s biggest bond investor Pimco, warned in a blog on the FT’s website that there were “signs of an institutional run on French banks”.

Europe could be thrown into a “full-blown banking crisis”, he added, unless the European Central Bank and governments worked together to create a European-style Tarp – the troubled asset relief programme put in place by the US in the weeks after Lehman Brothers collapsed in September 2008.

Even gold appeared to be losing its lustre on Thursday. Its price crashed as spooked investors decided to cash in after a record boom in the price of the precious metal.

Analysts said investors were selling gold to buy dollars, betting on a strengthening US currency. They noted, worryingly, that a similar trend occurred after the collapse of Lehman which ushered in the worst recession in living memory. Gold is a traditional safe haven during dark financial times. “Gold has been a pseudo currency for traders,” said Stuart Rosenthal of Factor Advisors. “It’s been a vote of no confidence on the US dollar.”

Now traders have changed their minds and are selling up: gold dropped to ,742 an ounce in early trading, a fall of 4%. The price of silver, which has enjoyed a similar boom, also collapsed.

Neil Meader, research director at metals consultancy GFMS, said the primary reason was the rising dollar. “The dollar and gold tend to be negatively correlated.”

Markets are hoping for a commitment of co-ordinated action to tackle the looming economic crisis from G20 finance ministers, who will meet in Washington on Saturday on the fringes of the IMF’s meeting.

The World Bank is also holding its annual meeting this week, and its president, Robert Zoellick, warned that the world’s poorest countries would be hit hard if Europe and the US failed to resolve the mounting crisis. “Some developed country officials sound like their woes are just their business. Not so,” he said.

“In 2008, many people said they did not see the turbulence coming. Leaders have no such excuse now. Dangerous times call for courageous people.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds