EU finance ministers today abandoned the idea of a pan-EU guarantee scheme for banks as the announcement of details of a bank recapitalisation plan was delayed amid tensions over how to support banks and address a credit freeze.
The ministers, meeting today in Brussels, rejected proposals to combine state guarantees across the EU into a single scheme for banks, an idea academics and financial experts had said was necessary. It will now be up to individual countries to stand behind their lenders if they experience difficulty borrowing.
But Luxembourg's Luc Frieden warned in the meeting that such national guarantees were unlikely to work in tackling a European wide problem, said one official present.
While such a move may work for economically strong countries like Germany, it will do little to lift confidence in banks in weaker states such as Spain or Portugal. A similar guarantee by Ireland for its financial system ultimately overwhelmed it, forcing it to seek an international bailout.
If banks and countries are struggling to raise capital, they can theoretically turn to the euro zone's European Financial Stability Fund (EFSF) as a last resort, although that has also been thrown into doubt by the struggle to leverage up the EFSF's own resources.
The political impasse on both fronts adds to the case for the European Central Bank to further intervene.
Earlier Italian prime minister Mario Monti insisted his government has not made any approach to the International Monetary Fund for help.
Mr Monti, attending his first meeting of European finance ministers since taking office, also pledged measures to ensure that Italy meets its goal of balancing the budget even if economic prospects worsen
He said he had outlined measures that he will present to the cabinet on Monday to bring public finances under control and had received a "very positive" response from partners.
"I confirmed the objective of a balanced budget in 2013," he told a news conference.
He said the programme, combining measures pledged by former prime minister Silvio Berlusconi's centre-right government and further structural reforms, would ensure the goal was reached "even in the face of a possible deterioration in the economic cycle which may be greater than expected".
Italy, one of the world's slowest growing economies over the past decade, faces the prospect of recession next year with the Organisation for Economic Cooperation and Development forecasting that the economy will contract by 0.5 per cent.
Mr Monti is expected to announce measures including an increase in pension ages, a revamped housing tax and a wealth tax on private assets as he seeks to restore shattered market confidence in Italy's public finances.
"If Italy misses this challenge, or does less than what is expected of it, the consequences would be very serious for everybody," Mr Monti said.
Italy, the euro zone's third largest economy, has been at the centre of the debt crisis, with yields on its 10 year bonds at over 7 percent, around the levels seen when countries like Greece and Ireland were forced to seek a bailout.
Mr Monti said he had met the European representative from the IMF today but he denied that Italy was on the point of requesting aid.
"This has not been considered," he said but noted that there had been some progress on integrating the role of the European Central Bank, the euro zone's own bailout fund, known as the European Financial Stability Fund and the IMF.
"On the role of the EFSF, the ECB and IMF, there have been steps forward," Mr Monti told a news conference after a meeting of European finance ministers.
"I don't really feel there is absolute clarity in every respect on this important group of European financial institutions which Europe can and should deploy better and more consistently, and do so very quickly, so that they can contribute to a solution of its problems."
However he said the meeting had not discussed changing the role of the ECB so that it became a lender of last resort, as many in Italy have been urging.
Reuters
