Brussels - More European banks may fail as cash injections dry up and the region's economy grinds to a near-halt next year, the International Monetary Fund warned Tuesday.
The IMF said in its economic outlook for Europe that banks are still under severe pressure to reduce their high leverage - the amount of debt they carry in proportion to their assets.
It said recapitalisation was "now likely to slow" because cash-rich investors - such as sovereign wealth funds and institutional investors such as pension funds - are now less interested in buying into banks. Instead, governments have decided to take equity stakes and become the provider of new capital.
The IMF said stock markets are watching leverage closely and that European banks tended to score less favourably than US rivals.
This means that banks are now more reliant on government help, selling off assets and combining with rivals to shore up their capital, the IMF said.
A full-blown banking crisis in Europe is "improbable," the fund said, but it warned that trouble was far from over as borrowing costs and credit default spreads rise and credit becomes harder to get.
"Additional banks may fail, as implied by their very high risk spreads and market doubts about the viability of their business models," it said.
It called on European leaders to make "a decisive commitment to concerted and coordinated action to alleviate financial stresses" and avoid the serious risk of European banks retrenching to national markets, undoing efforts to join European economies more closely.
Individual action
European Union governments have put up some €2 trillion in recent weeks in a bid to restore confidence in the troubled financial sector after banks froze lending to each other. The money includes guarantees that might not be spent, but also new capital injections in some countries such as Britain, France and Germany.
The countries have taken action individually on the basis of broad principles agreed at an economic summit earlier this month.
The IMF predicts that the 15 nations that share the euro will barely grow next year, expanding just 0.2%. The largest economy in the region, Germany, will stagnate, it said.
Countries where a housing bubble is bursting will see sharper downturns, particularly Denmark, Ireland, Spain and Britain.
Business activity will be "very weak" in the second half of 2008 and the first half of next year, but should rebound in 2010, the IMF said.
Companies that are dependent on bank lending will be hit hard by the credit crunch, the report said, with default rates "expected to rise from their recent historically low levels." Highly leveraged firms and real-estate related businesses are particularly vulnerable, it said.
The IMF also warned that high oil prices - at an average of $89 a barrel - could slow growth over the longer term.
- AP