European Union finance ministers need to agree on the treatment of toxic debt, EU Monetary and Economic Affairs Commissioner Joaquim Almunia urged ahead of a meeting of the bloc’s finance ministers on Tuesday.
“Irrespective of whether action takes the form of a bad bank or an insurance scheme, what matters first and foremost is that we agree on which assets will be eligible and how to value them,” Almunia wrote in a commentary in the Wall Street Journal.
Almunia said European Union finance ministers would study the matter at talks on Tuesday, adding the problem of complex debt securities that no one wants to trade any more must be solved to enable credit to flow again.
Agreeing on how to handle such assets -- which proliferated during a long-running credit boom and helped to trigger the credit crunch -- would minimize potential cost for taxpayers and avoid distortion of competition, he said.
The Financial Times Deutschland newspaper reported on Monday that the European Commission was considering requiring banks to fully disclose their risky assets and write them down to their market value before the lenders would be allowed to transfer them to state-supported bad banks.
The FTD quoted an internal Commission document as saying that valuing the assets at market prices would ensure that writedowns would be absorbed through a bank’s equity capital first, helping to minimize distortion to competition as well as costs to the public purse.
The document would be discussed on Monday by the EU Economic and Financial Committee, including senior finance officials from EU national governments, the European Central Bank and the EU Commission, the paper said.
The disclosure and writedowns of the securities before they are placed with the state could cause some banks’ capital to fall below the regulatory minimum, the paper quoted the document as saying.
“Governments would then have to decide whether to recapitalize the banks if they are sustainable, wind them down or nationalize them,” the paper quoted the document as saying.
The Commission wants to set rules for the entire EU on which securities can be off-loaded to the state and how they will be valued, the newspaper said, but quoted the Commission document as saying that national supervisory authorities would need to decide how the book value of the securities could be brought in line with their market value.
In his comment for the Wall Street Journal, Almunia said he hoped for a gradual recovery in the second half of this year. “... the fiscal stimulus measures announced by countries worldwide, including in the EU, should enable us to stem the tide of bad news and create the conditions for a gradual recovery in the H2 of 2009,” he said.
“But for this to happen, the immediate and most urgent priority is to break the spiral of a deteriorating economic outlook creating feedback effects on financial activity and back again onto the real economy,” he added. (Reuters)