IMF: Timing of euro recovery is uncertain

Aoife White, AP Business Writer
On Monday June 8, 2009, 3:24 pm EDT

LUXEMBOURG (AP) -- The International Monetary Fund said Monday that the timing of economic recovery in the 16 nations that share the euro was "uncertain."
It said any recovery would be slow and called on European governments to stress test banks and launch a "resolute and coordinated clean up of the banking system" to restore confidence.
The euro zone fell into recession last year and is now seeing unemployment surge to the highest level in over a decade as households cut back spending and demand for high-value European exports plunges, partly on the high value of the euro against other currencies.
The IMF called on the European Central Bank to keep considering unconventional options "including active credit easing" or printing more money to stimulate growth.
It said the ECB should also explore any margin for cutting interest rates under 1 percent level "as soon as possible."
But it warned that reducing rates under the current level, the lowest ever for the euro area, needed to be judged against possible adverse effects on money markets. Lower rates could see investors pull money out of the euro area to get a higher return elsewhere.
In a report to euro zone finance ministers at a regular monthly meeting, the IMF warned that Europe "can hardly afford a piecemeal approach" to cleaning up the battered banking system after dozens of banks sought state bailouts to avert collapse late last year.
The IMF said the EU needed a proactive strategy to deal with the weakened financial system to review how much capital banks needed to put aside to cover the risk of more loan defaults, to purge problem assets such as securities from banks' balance sheets and to restructure banks.
It called for "a comprehensive review to assess capital needs and viability" that would assess how badly an ongoing recession would hit banks' capital reserves, which they hold to shield themselves against the risk of defaults from loans -- likely to soar in future months.
"This review needs to result in follow-up action comprising disclosure, recapitalization, and, where needed, restructuring or resolution of financial institutions," it said.
It said governments and banks needed more certainty on bank rescues, saying nations should have the option of taking control of financial institutions at an early stage without shareholder or creditor approval.
Instead, such rescues should be "subject to ex post judicial review," it said.
This appears to target the messy government bailout and carve up of Dutch-Belgian bank Fortis was held up when shareholders won a court challenge that they should have been consulted when the Dutch, Belgian and Luxembourg governments swooped in to rescue the bank in September and October.