EUROPEAN UNION finance ministers agreed yesterday on fresh efforts to restore the flow of bank credit to pre-crisis levels, saying it was vital to maintain loans during the developed world’s worst recession in 60 years.
Ministers approved an initiative under which banks will be encouraged to use increased capital reserves not merely to meet regulatory requirements but also to make new loans to business.
“It’s important that banks remember at a time like this that they can use their reserves to maintain lending,” UK chancellor Alistair Darling said.
EU leaders are expected to endorse the proposal at a March 19th-20th summit in Brussels.
Ministers of the 27-nation EU reaffirmed their commitment to medium-term fiscal discipline, saying governments’ soaring budget deficits were a response to circumstances and would be reversed as soon as possible.
Yesterday’s talks were overshadowed by concern in financial markets over how public finances are being battered by the spending programmes with which governments are fighting the recession.
Czech finance minister Miroslav Kalousek said ministers had agreed not to open discussions on a possible “phase two” fiscal stimulus, but rather to concentrate on implementing a €200 billion initiative endorsed last month.
“The markets are already registering a certain risk. There are limits to the amount of borrowing that can take place,” Mr Kalousek said.
Joaquín Almunia, the EU’s monetary affairs commissioner, said the need to revive credit flows to European businesses was a central topic in yesterday’s discussions.
According to European Commission forecasts released on Monday, the 16-nation euro zone’s budget deficit will rise to 4.4 per cent of gross domestic product in 2010 from 4 per cent this year and 1.7 per cent last year.
The euro zone’s public debt is predicted to rise to 75.8 per cent of GDP in 2010 from 72.7 per cent this year and 68.7 per cent last year. Both estimates are far above the normal ceilings allowed under EU fiscal rules of a 3 per cent deficit and public debt of 60 per cent.
Several finance ministers emphasised that these limits continued to apply
"During a crisis, you can't throw potential reference points or targets overboard. There is a day after, and excess debt will catch up with us more quickly than we can imagine," said Austrian finance minister Josef Pröll. – ( Financial Timesservice)
