Crisis Threatens Europe Economy

King Says Crisis Threatens Europe Economy as Stability Outlook Worsen

By Scott Hamilton  shamilton8@bloomberg.net; 

and  Gabi Thesing gthesing@bloomberg.net

Dec. 23 (Bloomberg) -- Mervyn  King, vice chairman of the European Systemic Risk Board, said Europe’s sovereign debt crisis is threatening to hurt the real economy and the outlook for financial stability has worsened.

Growth prospects “have deteriorated” since September, King, who is also governor of the Bank of England, said at a briefing hosted by the European Central Bank in Frankfurt yesterday. “Investors lack confidence to continue to provide normal levels of funding. Dependence on central banks has risen.”

The ECB loaned banks a record 489 billion euros ($636 billion) for three years on Dec. 21 to avert a credit crunch from the sovereign debt crisis. The central bank said earlier this week that the turmoil has taken on systemic proportions not seen since the 2008 collapse of Lehman Brothers Holdings Inc.

King said the outlook for financial stability has “worsened” since the last ESRB meeting in September, and while intervention by the ECB is expected to “assuage funding problems in the near term, in the longer term private funding markets must be revitalized.”

Bank shares have suffered this year as borrowing costs surged in the euro region. The Stoxx 600 Banks Index has fallen 28 percent since the end of June, compared with a 12 percent decline by the Stoxx Europe 600 Banks Index.

Capital Plea

King also appealed to banks not to “reduce lending to the real economy” as they increase their capital levels to meet new standards set by regulators.

“We are very conscious there is extreme risk aversion in private financial markets,” he said. “We want a more robust banking system so that whatever risks crystallize, whatever their source, the banking system is in a better position than 2008.” There was “no discussion” at the ESRB meeting of any country leaving the euro area, King said. Still, “all financial institutions are advised to prepare for a wide range of contingencies,” he said.

Andrea Enria , the second ESRB vice chair who is also the chairman of the European Banking Authority, said he is “disappointed” by European leaders dithering over putting rescue measures in place, effectively delaying Europe’s bank recapitalization.

“We have always been quite adamant in all occasions, also in the debate running up to the decision, that this should have been a comprehensive package,” Enria said. This includes “recapitalization, some measures -- funding guarantees -- addressing the funding problems and strengthening of the European Financial Stability Facility and of the tools to deal with the sovereign crisis.”

The ESRB, which aims to warn of brewing risks in the financial system, was set up in January (Dec. 16, 2010 to be exact) as part of a new European architecture designed to ward off another financial crisis such as that which followed the Lehman collapse. Its 65-memberboard is headed by ECB President Mario Draghi.

Additional Story by Scott Hamilton King Says ESRB Saw Crisis Conditions ‘Worsened’ Since September”.