LITTLE ROCK — The European Union’s executive office on Wednesday said the 17-country eurozone needs a “banking union” that can centrally oversee and — if needed — bail out the sector, which has become a weak link in the continent’s financial system.
Fears that the cost of bank rescues could cause governments to need bailouts of their own have been fueling Europe’s debt crisis in recent months.
Spain is in a particularly bad situation because its banks are not only holding huge amounts of shaky government bonds but also sitting on enormous losses on real-estate investments. The country’s borrowing rates have hit record highs this week as investors worry it does not have the money to save its banks. One of them asked for $23.6 billion last week.
But Europe’s attempts to address the weakness of some countries’ banking sectors has been hindered by the lack of a central authority with the power to tell banks what to do to improve their balance sheets. That power remains in the hands of the dozens of national regulators.
Highlighting the urgency of the issue, the European Commission suggested Wednesday that regulation of the entire eurozone banking sector be done centrally and that the cost of bailouts be shared.
“Ambitious steps to accelerate and deepen financial integration may be needed. Already before the crisis, it was acknowledged that the EU model of cross-border banking was not stable,” the Commission said in a report on how to deal with the financial crisis which has pushed the shared single currency to the brink of breakup.
Part of the proposal would see the eurozone’s permanent bailout fund charged with helping pay for bank bailouts. That would protect individual governments from having their public finances overwhelmed by the cost of rescuing a bank.
“Direct recapitalization by the [bailout fund] might be envisaged,” the Commission’s report said.
EU Commission President Jose Manuel Barroso said the bailout fund should be better able to help out troubled banks across national borders if need be. In the future, “the building blocks could include a banking union with integrated financial supervision and a single deposit guarantee scheme,” he said.
Germany, however, has long been against such an arrangement because, as the currency bloc’s paymaster, it would fund the majority of any expenses the European bailout fund runs into. German Chancellor Angela Merkel’s spokesman, Steffen Seibert, said there was no change in the country’s views: “The German position on direct recapitalization of banks from the European rescue fund is known.”
EU Commissioner Olli Rehn cautioned that the plan might call for the reopening of an EU treaty, a politically risky affair in the best of circumstances.
The European Commission also made specific recommendations to nations mired in the financial crisis on how to manage their national budgets and rein in debt and spending.
Spain, which is currently the focus of the European financial crisis, should be given an extra year — to 2014 — to get its budget deficit back within European targets.
Rehn said the Spanish government should be given such an extension only if it can effectively control the excessive spending in the semi-autonomous regions and present “solid two-year budget plans for 2013 and 2014.”
In this case, “we are ready to consider proposing an extension of the deadline to correct the excessive deficit by one year,” Rehn said.
Spain’s borrowing costs soared Wednesday to reach their highest level since the country joined the euro.
The interest rate — or yield — on Spanish 10-year bonds, a key indicator of market confidence in a country’s ability to pay down its debt, shot up 25 basis points Wednesday to 6.67 percent — matching the level it hit at the height of the eurozone crisis late last year, according to financial data provider FactSet. The yield later fell back to hit 6.55 percent in afternoon trading.
A yield of 7 percent is seen by many analysts as unsustainable for a country to continue financing itself over the long term. Debt-stricken Greece and Ireland had to ask for an international bailout when borrowing costs reached the 7 percent level.
The country’s conservative government has introduced harsh austerity measures, including spending cuts on health and education, in an attempt to control the level of its debt relative to the size of its economy and bring it with European guidelines.
Economic confidence in the euro area declined more than economists forecast in May to the lowest in 2 1/2 years after the inconclusive elections in Greece raised the specter of a euro breakup.
An index of executive and consumer sentiment in the 17-nation euro area fell to 90.6 from a revised 92.9 in April, the European Commission in Brussels said Wednesday. That’s the lowest since October 2009.
Europe’s economic slump shows signs of deepening after Greece failed to form a government following May 6 elections while Spain struggles to clean up its banks.
“New elections in Greece and the Spanish banking crisis are fueling uncertainty among consumers and companies,” said Heinrich Bayer, an economist at Deutsche Postbank AG in Bonn.
Information for this article was contributed by Raf Casert, Daniel Woolls, Geir Moulson in Berlin and Don Melvin of The Associated Press and Simone Meier, Kristian Siedenburg, Fabio Benedetti-Valentini, Maryam Nemazee and Simon Kennedy of Bloomberg News.
Business, Pages 25 on 05/31/2012