Share this article

print logo

European banks aim to avert panic; Signal their readiness to support institutions

On the eve of Greek elections, Europe's central bankers are hoping to avert a financial panic by signaling their readiness to support banks.

At the same time, the head of the European Central Bank is calling on nations to pursue steps that could eventually boost economic growth, such as easing corporate regulations.

For now, the stresses gripping Europe from its debt crisis are tightening. Governments are struggling to borrow. Banks are wary of lending to each other and their customers. And nervous depositors are pulling money from Greek and Spanish banks.

As European officials head for a Group of 20 summit in Mexico, where they'll face pressure to defuse the crisis, central bankers say it's up to government leaders to find a solution.

Mario Draghi, head of the ECB, said Friday that the central bank would continue to support solvent banks if the election results Sunday point to Greece's exit from the euro currency union and ignite panic in financial markets.

But what the eurozone needs most, Draghi said, is a tighter fiscal and political union to strengthen individual countries' banking systems.

Draghi and the central bank favor stronger action by political leaders to boost confidence and ease pressure on the ECB to take more emergency steps. Such steps might include further low-cost loans to banks or direct purchases of government bonds.

The ECB chief said he and other European Union officials are drafting proposals to revamp the eurozone and will address them at a summit of EU leaders late this month. Those proposals could include more centralized supervision of banks and individual countries' spending; action to stimulate growth; and some system of common borrowing that might prevent government defaults.

Still, any such program could take years to implement and would likely raise political objections.

In the meantime, Draghi said the ECB would keep supporting the banking system by providing credit, when necessary, to solvent banks.

But he argued that governments must also act. He called on them to take steps to boost growth by easing or dismantling business regulations. Such action could make it easier for companies to hire and fire and to cut through bureaucratic obstacles to starting businesses.

The surprise announcement late Thursday that the Bank of England will offer British banks up to $217 billion in loans has raised the possibility that further turbulence in Greece could make it harder for banks to get money to fund their operations.

Major banks take out overnight loans from other banks to pay day-to-day bills. If this lending freezes up, some banks won't be able to operate. That problem triggered Lehman Brothers' collapse in 2008, which, in turn, escalated panic and choked off interbank lending. Central banks had to intervene to give banks short-term loans.

European banks faced a similar scare last fall. The ECB resolved the problem by providing low-cost long-term loans. But Europe's banks have never really gotten back to normal, said Nicolas Veron, a senior fellow at the Brussels-based economic think tank Bruegel.

"There is no functioning interbank market," Veron said. Instead, there's a "substitution of the ECB for the interbank markets," which Vernon said isn't a permanent solution.

Leaders of the 17 countries in the eurozone must produce a plan to assess banks' health and decide how to close the weakest ones, Veron said.

In Greece, this weekend's national elections have become the latest focal point in Europe's crisis. The left-wing Syriza party wants to abandon Greece's international bailout terms. If that happened, Greece could be cut off from the bailout loans it needs and could face bankruptcy and leave the euro.

Jeffrey Bergstrand, a professor of international finance at the University of Notre Dame, said that if the Greek elections end with uncertainty about the results, the ensuing chaos could require intervention to stabilize markets and banks across Europe.