BRUSSELS ? Big banks across Europe will have to raise euro106 billion ($148 billion) to better withstand the turmoil of the debt crisis, preliminary figures showed, while eurozone leaders neared a deal to boost their bailout fund to over euro1 trillion ($1.4 trillion), a senior official said Wednesday.
The deal to force banks in the European Union to boost their rainy-day funds amid worsening market turmoil is a key part of a broader plan to solve the debt crisis that leaders have promised.
It was, however, only one third of a broader strategy which is expected to also include reducing Greece's debt load and boosting the eurozone's bailout fund.
After much delay, talks on the bailout fund finally saw some progress. The leaders of the 17-country eurozone want to give the fund, the euro440 billion European Financial Stability Facility, more firepower so it can stop the crisis from engulfing big countries like Italy and Spain. The question was how to do it with the most impact and the least risk for taxpayers.
A senior eurozone official said that consensus was emerging to allow the EFSF to insure private investors against the first 25 percent of losses on purchases of government bonds and other investments linked to helping the eurozone.
After contributing to the bailouts of Ireland, Portugal and Greece, the EFSF will have only about euro270 billion left. A scheme to provide insurance on bond issues could multiply the impact of the EFSF's lending power to over euro1 trillion, the official said, since it would make those bonds safer investments and attract demand.
The official, who was speaking on condition of anonymity because negotiations were still ongoing, cautioned however that the EFSF leveraging would not be agreed until other parts of the plan were nailed down.
In addition to acting as a direct insurer of bond issues from wobbly countries like Italy and Spain, the EFSF insurance scheme is also supposed to entice big institutional investors to contribute to a special fund that could be used to buy government bonds but also to help states recapitalize weak banks.
Such outside help may be necessary for Italy and Spain, whose banks were facing some of the biggest capital shortfalls.
Spanish banks have to raise euro26.2 billion ($36 billion), according to preliminary estimates from the European Banking Authority, while Italian banks must find euro14.8 billion ($20.6 billion). A shortfall of euro30 billion ($42 billion) in capital in Greek banks should be covered by the country's existing bailout program. The EBA said the figures were based on preliminary calculations and would be updated in November.
The official said there was still a lot of disagreement on how to cut Greece's massive debt, one of the other key issues.
France and several other countries insist that any losses taken by banks should be voluntary, while Germany is threatening to force cuts on investors if they are not willing to go far enough.
The head of the big banking lobby group that has been leading the negotiations on the behalf of private investors said there was no deal yet to cut the value of Greek bonds.
"There has been no agreement on any Greek deal or a specific 'haircut,'" Charles Dallara, the managing director of the Institute of International Finance, said in a statement. "We remain open to a dialogue in search of a voluntary agreement. There is no agreement on any element of a deal."
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