THE EURO zone is in a “very dangerous situation” but a consensus was emerging and there was a good chance of averting a financial calamity, EU commissioner Olli Rehn told a conference in Dublin.
The EU had not been able to put out “stubborn financial market bush fires” in the sovereign debt market, he said, and this was creating fresh concerns about the European banking system.
There would be another recession across Europe if the EU did not get the upper hand on the market turmoil, he said in a pre-recorded speech via video-link to the Irish Banking Federation conference. “No part of Europe could be saved from its consequences, including of course Ireland,” he said, calling for “strong and co-ordinated action” to tackle the crisis.
Talks were at “a key juncture” and there needed to be certainty around Greece, a strengthened European bailout fund and further capital put into European banks.
“We have a good chance of not only averting a financial calamity but to put Europe back on the path of sustained recovery,” he said.
The Government was on course to restoring sustainability in the public finances and reducing its budget deficit but tough decisions still had to be taken, said Mr Rehn.
The Department of Finance’s head of banking supervision, John Moran, warned against European banks being recapitalised along national lines as this could flood the markets with excess assets as banks are forced to deleverage themselves of overseas businesses.
It was “incredibly worrying” that more than €2 trillion of assets being disposed of in “a wave of deleveraging” could put further pressure on Europe’s economy.
This would add further strain to states and damage the economic growth that was essential for Ireland “to climb out of its financial problems”, said Mr Moran.
He called for a stable and centralised mechanism to fund deleveraging and recapitalisations.
Applying state aid rules in the recapitalisation of banks by various states could create “siloed, national-based banks”, he warned.
“We really need to avoid a situation where we are dumping assets at any cost,” he told reporters.m “What worries me is the impact of such a large body of deleveraging if it is accelerated.”
On the domestic banking front, Mr Moran said he was expecting Allied Irish Banks to submit to the department this week its proposal for the pay package of its new chief executive. He said bank staff required motivation and that this could start with the reintroduction of promotions with pay increases but he added that this was firstly a matter for the Government.
Mr Moran said that the department was expecting second-round bids for Irish Life later this month.
He encouraged the banks to raise more funding secured on overseas assets after Bank of Ireland raised loans of €1.1 billion this week and a similar loan by Irish Life and Permanent in August.
AIB has yet to raise term funding secured on loans but plans to follow the other banks this year.
“It would be nice to see three out of three,” said Mr Moran.
He expected the banks to have less borrowed from the European and Irish Central Banks at the end of the year than at the start as deposits returned to the banks.
