Europe bank’s exposure to the eurozone debt crisis has increased to euro 300bn (GBP 263bn), the IMF warned in its Global Stability Report as it urged lenders to raise more cash to protect against potential losses.
In its twice-yearly Global Financial Stability Report, the fund said that risks to financial stability have increased “substantially” over the past few months, with weaker growth creating a challenge for countries with high debts.
The IMF said the eurozone should use its euro 440bn rescue fund to beef up the capital cushions of the region’s weakest banks.
“Risks are elevated and time is running out to tackle vulnerabilities that threaten the global financial system and the ongoing economic recovery,” the report said.
It estimated that the eurozone debt crisis has directly cost banks in the European Union euro 200bn since Greece’s debt crisis erupted. Of this, euro 60bn comes from sovereign debt in Greece, euro 20bn from Ireland and Portugal, and euro 120bn from Belgium, Spain and Italy.
The IMF estimated that there was a further euro 100bn in additional costs linked to the banks of those six countries.
“This estimate does not measure the capital needs of banks, which would require a full assessment of bank balance sheets and income positions. Rather, it seeks to approximate the increase in sovereign credit risk experienced by banks over the past two years,” the global lender said.
The fund said that while the numbers are “based on market assessments of credit risk, which may reflect a degree of overshooting, the underlying problems that they highlight are real”.
Earlier this month, IMF Managing director Christine Lagarde was attacked by European officials when she called for a mandatory recapitalisation of Europe’s banks.
News reports last month said the IMF had identified a euro 200bn shortfall in European bank capital, but officials in Europe insisted the figure was off the mark and the capital position of most banks in the region was solid.
European officials stood by bank stress tests they conducted in July that found only eight banks deficient in capital with a combined shortfall of only euro 2.5bn, a figure widely criticised as too low and politically skewed.
The report said banks should raise capital privately although public funds may be necessary for viable banks.
The IMF said the damage could spread from Europe to banks in emerging market economies.
For the first time, it estimated emerging market bank balance sheets could be reduced by up to 6 percentage points if the pace of global growth fell sharply on the back of Europe’s troubles and forced a sudden reversal in capital flows.
The IMF said banks in Latin America were most vulnerable, while banks in Asia and eastern Europe were more sensitive to increases in funding costs.
It called for a “coherent” strategy to address the risk of financial and economic spillovers from the European debt crisis, which has forced Greece, Portugal and Ireland to turn to the European Union and IMF for rescue loans.
The report said political differences among European policymakers on providing support for crisis-hit countries in the eurozone periphery slowed Europe’s crisis response and rattled confidence.
It also said there were growing doubts that political leaders in the United States could agree on ways to lower US budget deficits over the medium-term, which it called critical for global financial stability because of the status of the dollar as a reserve currency.
The IMF said markets had started to question the ability of both Europe and the United States to get their budget deficits under control, raising concerns about the risk of default.
It said banks in some economies have already lost access to private funding markets, raising the possibility of a wider bank lending freeze and more severe deleveraging unless adequate steps were taken to address budget strains and strengthen banks.