Banks need repairs to achieve recovery: IMF

Holders of preference shares and activists of the Mortgage Victim’s Platform protest outside the regional Bankia headquarters in Valencia yesterday. They were demonstrating against Bankia’s €200mn ($265mn) profit for the first half of 2013, the fall in prices of preference shares and home evictions. Eurozone’s rising unemployment, high youth joblessness, weak demand and still-fragile banking sector “have increased the risks of stagnation, social and political tensions and spillovers to the global economy,” the IMF said.

The International Monetary Fund (IMF) warned yesterday that the eurozone faces a challenging recovery, urging fast action to fix the still-wobbly banking sector and get credit flowing especially to smaller firms. “We worry that the economic recovery across the euro area still remains elusive, and this weakness is now not only in the periphery but also the core countries,” Mahmood Pradhan, deputy director in the IMF’s European Department, told journalists on a conference call. He was also quick to note, however, that the crisis-battered currency bloc has achieved an “impressive degree of stability.” “Yes, the euro area faces a very difficult, challenging economic backdrop, but I don’t think we should understate the amount of progress,” Pradhan said. The assessment issued by the IMF’s executive board praised the euro area’s work towards forming a banking union, strengthening its bailout fund and improving oversight of national budgets. But there have been concerns that its reform momentum might fizzle as the economic situation improves. On Wednesday, analysts predicted that the 17-member bloc could pull out of recession in the third quarter, after a key indicator showed that it was on the mend. The policies applied in the eurozone “have boosted confidence in the long-term viability of the monetary union,” the IMF acknowledged, noting that “extreme market stresses have subsided” along with the risk of a eurozone break-up. But its rising unemployment, high youth joblessness, weak demand and still-fragile banking sector “have increased the risks of stagnation, social and political tensions and spillovers to the global economy,” the Washington-based crisis lender found. IMF directors said that restoring sound bank balance sheets - a requisite to reviving the flow of credit, especially to the small- and medium-sized businesses that can quickly deliver much-needed growth - was “the first priority.” Needed “immediate steps” include full recognition of losses, recapitalising banks that are weak but viable, and closing or restructuring those that should not be salvaged. They welcomed plans for the capital needs of eurozone lenders to be assessed before a single bank supervisor for the bloc starts its work next year under the auspices of the European Central Bank (ECB). But they also called for an “independent third party” to be involved.