More public money required for bankers as IMF warns of €200bn blackhole in European banking system

Most International Monetary Fund reports are necessarily the result of compromise and negotiation. Rarely is the IMF allowed by its nation shareholders to tell it exactly as it sees it.

So the warning in the IMF's latest "Global Financial Stability Report" that European Union banks face a possible capital shortfall of €200bn to €300bn as a result of the eurozone sovereign debt crisis comes as quite an eye opener.

European governments will have fought this assessment tooth and nail, for not only does it seem to add fuel to what is already a raging panic around the solvency of the European banking system, it also provides some indication of quite how much more public money is going to be required for recapitalisation.

The IMF is at pains to stress that the big numbers cited are an estimate of the increased sovereign credit risk in the EU banking system over the past two years, not of the extra capital needed by banks as such. None the less, they do provide a reasonable guess at the size of capital at risk. This is, if you like, the IMF's assessment of the unrealised losses in the European banking system as a result of the sovereign debt crisis.

Small wonder that many European banks can no longer access private funding markets. Small wonder too that European governments are so alarmed at this assessment, statement of the bleedin' obvious though it might be. Another round of bank bailouts so soon after the last one is anathma to most Europeans, worse, in some respects than the idea of bailing out sovereign nations directly.

Yet if this crisis is ever to be resolved, the IMF is surely right in asserting that recapitalisation of the banks is one of the first things that needs to happen. Most people will find the idea that more than four years after the banking crisis began, the banking system continues to require squillions of public money almost beyond belief.

It was reasonable to assume that the balance sheet problems of most banks had been "cured". Plainly they have not. Indeed the process seems barely to have begun. The danger of not recapitalising banks is that they will choose instead to boost their capital buffers and solvency through further deleveraging, which would in turn prompt a second credit crunch. Unpalatable though it is, governments must act.

As the IMF Stability Report warns, "Time is running out to address existing vulnerabilities. The set of policy choices that are both economically viable and politically feasible is shrinking as the crisis shifts into a new, more political phase". Quite so.