European finance ministers have been warned confidentially of the danger of a renewed credit crunch, as a "systemic" crisis in eurozone sovereign debt spills over to banks.
In a report prepared for ministers meeting in Poland on Friday and Saturday, obtained by press agency Reuters yesterday (14 September), senior EU officials said the 17-nation currency area faced a "risk of a vicious circle between sovereign debt, bank funding and negative growth". "While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic," the influential Economic and Financial Committee said.
A further reinforcement of bank resources is advisable," ministers were told in language that echoed an International Monetary Fund call for urgent action to recapitalise European banks. The report highlighted European policymakers' challenge to restore confidence as the leaders of Germany, France and Greece held a crucial conference call on efforts to avert a Greek default that could cause a global financial shock.
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