Lagarde snubbed in push to raise bank capital

Germany and Spain rebuffed International Monetary Fund Managing Director Christine Lagarde’s call for an “urgent,” potentially mandatory, recapitalisation of European banks.

German Finance Ministry spokeswoman Silke Bruns said European governments have already taken measures to strengthen banks, including increased capital requirements under so-called Basel III rules. Spain is already pushing lenders to bolster capital, said a spokesman for the Madrid-based finance ministry, who declined to be named in line with policy.

“In the event that new necessities emerge in the future, the instruments of the strengthened EFSF are available,” Bruns said at a briefing on Monday in Berlin, referring to the European Financial Stability Facility, the region’s financial backstop.

The world economy is in a “dangerous new phase” that requires action by governments, Lagarde told international finance officials and economists in Jackson Hole, Wyoming, yesterday. She spoke near the end of a month when the value of global equities dropped by $5.7 trillion on concern global growth is slowing and governments will be unable to tackle sovereign debt burdens.

Without an “urgent” recapitalisation, “we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis,” Lagarde said. Recapitalisation should be “substantial” and a mandatory move would be “the most efficient solution,” she said.

For its part, a European Union spokesman, Amadeu Altafaj, said banks in the region are better capitalised than a year ago.

‘KEY ASPECT’
“I don’t see any extra element” in Lagarde’s comments, Altafaj told reporters on Monday. “This discussion has already taken place between the EU and the IMF,” he said, adding that “restoring the banking sector is a key aspect” of the response to the financial crisis.

Spain introduced new capital requirements for lenders in February and banks have until September 30 to comply with the new rules, the Spanish spokesman said. Bruns said there is no contradiction between the basic views held by Lagarde and the German government.

Germany expects measures taken already to strengthen the financial sector to be “effective in the necessary way,” she said. Chancellor Angela Merkel’s government shares the views of European Central Bank President Jean-Claude Trichet that measures taken already will “prevent a liquidity crisis in the European banking sector.”