INTERVIEW: EU's Almunia calls for stress tests for European banks

By Nicholas Rigillo May 12, 2009, 13:28 GMT

Brussels - European Union governments should stress test their banks so as to ensure that they can withstand one of the bloc's deepest and longest recessions in decades, EU Economic and Monetary Affairs Commissioner Joaquin Almunia says.

In an exclusive interview with the German Press Agency dpa, the EU's top economic official also cautioned non-EU members against adopting the euro and insisted that the downturn would not water down the strict criteria for applicants to join the single currency.

The 60-year-old Spanish politician has repeatedly emphasized the need to rid Europe's banking system of so-called toxic, or impaired, assets, as a necessary condition for economic recovery.

'Unless the balance sheets of Europe's banks are cleaned and repaired, the credit flow will not be restored and the demands and needs of the real economy will not be fulfilled,' Almunia told dpa.

Last week, the United States government published the results of its own stress test on the country's 19 biggest banks, showing they would likely need a total of 75 billion dollars in additional capital to survive the recession.

But reluctant European governments have only just started debating whether to follow the US lead.

Eight months since the collapse of US investment giant Lehman Brothers, no one has yet managed to work out what proportion of the assets stashed in EU banks has gone toxic - a situation that has prompted the International Monetary Fund to accuse the euro area of lagging behind.

Almunia noted that Brussels has already provided governments with guidelines on how to treat impaired assets 'without endangering the internal market's level playing field.'

But he called on member states to do still more, urging them to stress-test their own banks.

'As the European Commission, we cannot impose a programme of stress tests. But we can encourage it, and we are encouraging it,' Almunia said.

The US stress test involved assessing whether the country's leading financial institutions have enough capital to survive the current recession and global financial turmoil, using a set of assumptions on the state of the economy in 2009 and 2010.

And while the responsibility for such tests in Europe would lie firmly with national regulators and supervisors, Almunia said Brussels could provide the common set of economic assumptions needed to make the tests' results comparable at EU level.

'The (stress test) ball is in Europe's court now,' Almunia told dpa at his office in the European Commission's Berlaymont headquarters in Brussels.

Almunia also cautioned would-be euro members such as Poland or Hungary against believing that Europe's economic blues would make it easier for them to join.

'Neither the conditions, not the interpretation of these conditions, have or will change because of the crisis,' he said.

And while the euro is becoming increasingly popular as a global currency, the commissioner dismissed suggestions that a country could adopt the single currency without first joining the EU.

'We don't recommend unilaterally adopting the euro without being a member of the euro area, since the disadvantages are much bigger than the advantages,' he said.

The euro is already widely used in non-EU Balkan countries such as Montenegro and Kosovo.

And in Iceland, which was practically bankrupted by the global credit crunch, the new government is now preparing a bid for EU membership as a means of anchoring its economy in the euro area.